In a similar vein to personal credit, business credit is reflective of a company’s trustworthiness with regard to the way they manage money. This means that it is vital for small businesses because it directly influences their capacity to obtain the funding they require in order to cover business costs and initiate growth.
Given that 27% of small businesses surveyed by the NSBA indicated they were unable to receive the funding they needed, and 46% of all small businesses use personal credit cards, according to research by Mastercard, it would appear that despite its importance small businesses have trouble building the credit they require so desperately.
Benefits of Building Strong Business Credit
The access to lending that good business credit provides is the lifeline of modern businesses – it grants an ability to obtain the capital needed to expand and cover daily expenses. Furthermore, businesses that take the time to build their business credit are exposed to greater financial opportunities.
A good credit score creates economic security for businesses as they can obtain financing far quicker. This is helpful when businesses require loans to quickly solve cash flow problems. Since lenders rely on a business’s credit score when deciding to grant them financing, having a high business credit score vastly improves its chances of being granted a small business loan and other business financing products.
A high business credit score demonstrates reliability to a creditor that a business can be trusted to make repayments on time – this, in turn, helps to speed up the business’s qualification for the loan. Some lenders will even offer lower, more favorable interest rates if the business credit score is strong enough.
How to Get Good Credit
Form an LLC
The average company is estimated to require between 12-18 months to improve their business credit by a meaningful amount. When considering how to build business credit, the first step involves ensuring a business is registered as an LLC. This is because banks and lenders prefer legal business entities since the protection they provide their business assets also shields them from risk as a creditor.
Forming an LLC is one of the most economic and straightforward legal business entities that offer limited liability protection, which is the primary reason this is suggested for new businesses.
Get an EIN
Businesses are required by the IRS to provide an Employer Identification Number (EIN); this is a Social Security number for small businesses. EINs are similarly attached to business credit profiles so that lenders can use this number to check the creditworthiness of a company.
All banks will require businesses to have an EIN in order to open their own business bank account. This is paramount since it enables the business to create a fresh credit trail that is not associated with the owner’s personal credit.
Get a Business Bank Account
A business bank account is a final suggestion for improving business credit. It further encroaches on the idea of limited liability protection by separating personal finances from businesses. Ownership of a business bank account is often used by creditors as an additional indicator for eligibility for loans and other credit.
In addition to this, business bank accounts add a sense of transparency to your business finances, making it crystal clear for lenders to decide how much your business is worth and, judging by how it has managed money in the past, how much your business can be trusted to repay the loan.
Copyright: TRUiC
Closing Statement
Evidently, maintaining a good business credit score is vital for newer businesses for a multitude of reasons; it enables such companies to access the capital they need in order to expand or cover daily expenses. This also produces a financial safety net as a secondary effect since businesses can quickly acquire financing to solve cash flow problems where necessary. On top of all this, the reliability that a high business credit score demonstrates to lenders often means that businesses with such credit scores will qualify for loans more quickly.
To learn more about the importance of business credit, as well as how to improve it, please see The Really Useful Information Company’s (TRUiC) website for more information.