Some things never change—including the No. 1 cause of business failure: lack of capital. For small business owners, not having enough money is frequently the difference between success and failure. To obtain the necessary funds to grow your business, you need to have a good credit score, which tells lenders your business is financially healthy.
Lenders may use both your business and personal credit scores when evaluating you for a business loan or line of credit, so it’s important to keep both types of scores healthy.
Ways Good Credit Can Help Your Small Business
There are several ways having good credit can help your small business grow.
Business financing opportunities: Whether you’re looking for a line of credit or a bank loan to improve cash flow, a high credit score improves your chances of loan approval. Lenders want to know your business can make payments on time.
Better loan terms: A good credit score typically means lenders will offer you better interest rates and higher credit limits: The better your creditworthiness, the better the terms.
Valuable supplier negotiating power: A good credit score can help your business secure advantageous payment terms with your suppliers.
Better insurance premiums: Few business owners are aware that insurance companies use their credit score to help determine premium costs.
Expansion partners: Business expansion, whether that requires buying new equipment, hiring more employees, adding more locations, or all of the above, takes money that you may not have on hand. Investors or business partners want to know a company is financially sound before they devote time and money to partnering with them—and a company’s credit score is a good indicator of financial health.
Building Credit for Your Business
It’s essential to establish good credit for your business right from the start. A business’s credit score is based on the number of years in business, payment history and new credit lines opened, among other factors. Here’s what to keep in mind as you grow your business.
As you establish your business credit history, be conscious of how many creditors your business takes on. Whether you make payment agreements with suppliers, obtain bank loans, or sign up for business credit cards, all are considered creditors and report your transactions to the business credit bureaus (Experian, Dun & Bradstreet, and Equifax).
Make all debt payments on time and keep your credit card balances low.
You may think it’s smart to close out credit card accounts you no longer use, but that can negatively affect your credit score. Your credit utilization ratio measures how much of your available revolving credit you’re using at any given time, and open accounts with zero balances help lower your utilization rate. The lower your credit utilization, the better it is for your score.
Creditors report to bureaus typically every 30 to 45 days, so it’s vital to check your business credit report and score regularly.
Credit report mistakes are rare but can happen, so make sure you contact the appropriate credit bureau immediately if you find an error in your report. Most errors can be corrected online by filing a dispute with the bureau’s dispute center. Correcting inaccuracies on your credit report can improve your credit score.
If you run your business as a sole proprietorship, your personal credit score is also your business credit score—even if you have a separate business bank account and credit cards. When you incorporate or register as a limited liability company (LLC), your business is considered a separate entity with its own credit score.
However, as a growing business, you never know when an investor or lender will ask for both your business and personal credit reports. So be vigilant about monitoring both your business and personal credit scores, paying your bills on time, and keeping your credit card balances low.
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Maria Valdez Haubrich is the Executive Editor of SmallBizDaily.com where she is responsible for all web content. Previously she was the Executive Editor at Entrepreneur Magazine, where she worked for more than 20 years.