top of page

The Ultimate Guide on Establishing Business Credit to Help Your Company Grow

Building and maintaining credit is essential for any business. It opens up opportunities for partnerships, financing, and growth. Therefore, any founder needs to take proactive steps to establish and maintain good credit for their business.

What is good credit for business?

A business credit score is a number that represents the creditworthiness of a business. The score assesses the risk of lending money or extending credit to a company. Various factors impact the business's credit history, such as payment history, credit utilization, length of credit history, and other financial information. An 80 or above on a scale of 0 to 100 is considered a good business credit score according to the Paydex evaluation system.

In the rest of this guide, we will share the best practices for building and maintaining good business credit. We will cover topics such as the types of credit available for businesses, how to build credit, and how to maintain a high credit score.

6 Types of Business Credit

These are examples of various business credits:

1. Business lines of credit: This is a revolving line of credit that businesses can use for working capital, to cover short-term expenses, or to take advantage of future opportunities.

2. Business credit cards: These are specifically designed for businesses, allowing businesses to make purchases and manage expenses more easily. They may offer rewards programs and cash-back incentives.

3. Term loans: These are loans with a set repayment schedule and interest rate, and they are often used to finance large purchases such as equipment or real estate.

4. Invoice financing: This is the process where a business sells its outstanding invoices to a lender for a cash advance. Invoice financing is useful during times of cash flow constraints.

5. Equipment financing: This loan finances the acquisition costs of physical assets such as equipment or machinery.

6. Small Business Administration loans (SBA): These are loans guaranteed by the SBA and available to micro and small businesses that might not meet the criteria to apply for traditional loans.

Businesses must understand their options and choose the type of credit that best fits their needs and goals.

11 Ways to Build and Maintain Business Credit

Building business credit takes time and effort, but it's crucial to establishing and growing a successful business. Here are some steps to help build business credit:

1. Operate legally.

Ensure your business is operating legally. By incorporating your business, you can establish it as a separate legal entity. This will protect your personal credit and assets from being acquired if you go out of business or experience any financial losses. Next, you want to obtain a federal tax ID number, also referred to as the Employer Identification Number (EIN), from the IRS. This number is required for tax purposes and can be used to establish business credit.

2. Open a business bank account.

Opening a separate bank account can help establish your business's financial history and credibility. Register with your legally recognized company details, such as name, EIN, address, and shareholders.

3. Establish credit with vendors and suppliers.

Select vendors and suppliers who report payments to credit bureaus. They will record your transactions and timely payments with the credit institutions, which will, in turn, give your business flawless payment history.

4. Apply for a business credit card.

Using a business credit card responsibly can help build your business credit. However, it's important to note that a business credit card can either build or destroy your credit score. Before using credit cards, ensure you are financially educated and equipped to avoid potential financial pitfalls or unnecessary debts.

Paying your credit card bills on time regularly can help improve your credit score, while missed or late payments can lower your score. Using too much of your available credit can lower your credit score while using a smaller percentage of your available credit can help improve your score.

The length of time you have had credit accounts, including credit cards, can also impact your credit score. Keeping your credit accounts open for longer periods can help improve your score. Having various credit cards can help improve your credit score as it demonstrates that you can manage different credit responsibly.

5. Have digital documents with references.

We already mentioned the importance of establishing good credit with vendors who report payments to credit bureaus, but what

about those who don't? How can we utilize our payment history with such vendors to boost our credit?

One effective way to do this is by negotiating payment terms. This could include agreements to make payments in 30 or 60 days as deemed suitable. Once you've established these terms, honor them consistently and promptly. As you continue to ask for net 30 terms from your vendors, establish a reference file as proof of your payment history.

Your reference file should include your trade references' names, contact information, and details about your payment history. This consists of the dates and amounts of invoices paid, the agreed-upon terms, and any other relevant information that may be useful for verifying your creditworthiness.

Creating a digital document with this information gives you a handy reference file that you can share instantly. This helps you establish credit with new suppliers and vendors more quickly and easily and enables you to negotiate better payment terms in the future. Keep your references up-to-date and continue paying your bills on time to maintain a positive payment history.

6. Monitor your credit.

Did you know that there could be errors in your business credit report? Mistakes could be in the form of inaccurate or outdated information. These duplicate accounts can make your company appear to have more debt than it actually has, incorrect payment history, and fraudulent activities.

Regularly monitoring your business credit reports can help you quickly identify errors and address any issues. Here are some steps you can take to monitor your business credit:

7. Obtain a copy of your business credit report.

Start by obtaining a copy of your business credit report from one of the major business credit reporting agencies, such as Dun & Bradstreet, Experian, or Equifax. Review the report for any errors or inaccuracies.

8. Set up credit monitoring.

Consider setting up credit monitoring services that will alert you to any changes in your business credit report. Many credit reporting agencies offer these services for a fee.

9. Keep track of your payment history.

Monitor your payment history with vendors and suppliers to ensure payments are made on time. Late payments or delinquent accounts will negatively impact your business credit score.

10. Monitor public records.

Check public records for any liens, judgments, or bankruptcies affecting your business credit.

11. Review credit applications.

Review any credit applications or inquiries to your business credit report. Ensure they are legitimate and you're aware of any new accounts opened.

Businesses can build a strong credit profile over time by following these steps and using credit responsibly. This can help increase their chances of being approved for loans, credit lines, and other forms of financing, as well as secure better terms and interest rates.

Share the article if you found it helpful, and bookmark it to refer to it in the future.

Subscribe to the Digital Orange Juice for juicy ideas and the people who fund them. You can find out about our next pitch competitions. Also, be sure to join our new community BGV Connect!

62 views0 comments


bottom of page