Welcome to the topic “How to build business credit for business loans“
The business credit of a company refers to the measure of how worthy a company is in the eyes of banks and finance companies to receive credit. In simpler words, it can be said that the business credit of a company is the ability a company to pay later. A company can borrow certain sums of money when they need it on the condition of returning it later.
Business credit is important because good and bad credit can make all the difference. For many small businesses, bad business credit is what gets their loan application rejected. Business credit can be earned by opening commercial credit accounts, but the important aspect is to manage them appropriately to get maximum return out of it.
A business credit report is a general reflection of the company’s performance. It includes the risks that are associated with the industry the company is currently operating in, and the business operational data of the company. It further includes the company’s payment history.
How does business credit work?
Business credit is connected to the Employer Identification Number (EIN). When you make purchases and pay for different services and products for your business, it gets reflected through the credit score of the business. This information is part of the credit history for that specific business and it is reported to different credit bureaus.
The business credit agencies collect information from the vendors as well as from the creditors, whom a company does business with. The credit is reported in form of a numerical value by using a credit determining algorithm.
The credit depends on the policy of each agency, which serves as another distinguishing feature between personal and business credit. The credit is normally reported in form of numerical value, which ranges from 1 to 100. A higher value reflects more credibility of a company. This statistic is important as it determines the ability of the company to return a loan or a bill on time.
Certain factors can influence business credit. These include:
Credit:
This is a reflection of general trends of the user including their payment history, balance history, and the length of their credit history.
Demographic details:
This is a general reflection of the size of the business as well as the risks that are associated with that specific business.
Public records:
This reflects the public records of a company including judgments and bankruptcy.
Types of business credit
Before moving on to the importance of business credit, we must understand the different types of credit. There are different types of business credits. There are four primary categories of business credit, you can get. Among them are:
1) Installment account
This refers to the type of business loan with a fixed period and fixed interest rate for the repayment of the loan. Similarly, the amount of money is also similar.
2) Revolving accounts
Revolving credit refers to a more flexible form of financing option, where the customer has around-the-clock access to the funds for any purpose.
3) Vendor accounts
This type of business credit allows the company to pay for the product or services after they have acquired them. The time frame for paying back varies, but the average is that you will have to pay back after thirty days of making the purchase.
4) Charge credit account
A charge card is similar to a credit card, but the distinguishing feature is that payments have to be made fully at the end of every month. Another distinguishing feature is that there is no present spending limit on the card. The purchases are approved based on the previous spending history of the consumer.
Importance of business credit for loans
Business credit is used to determine the reliability of any business or company. The previous spending and purchasing patterns are looked at to understand if the company can be trusted with funds. It is similar to the functionalities of personal credit, where the reliability of an individual is determined.
This is more of a reality for small businesses, where the loans the company needs to grow and branch out are rejected based on bad credit scores. According to the research that was conducted by MasterCard, it was revealed that a reason for a poor score, especially for small businesses, was their inability to separate business expenses from personal expenditures. This phenomenon is often reflected through a business’s credit and leads to their request for a loan being rejected.
Business credit, similar to personal credit, has many important factors that make it essential for businesses and specifically for small businesses. One of the most important factors is that with help of good business credit, receiving loans becomes quicker and easier.
The loan lender will look at the credit score and determine if the company can be trusted with funding. Thus, it is important to have good business credit to acquire loans for business growth.
Building upon the trustworthiness of the company, good credit can be crucial in helping your company to get better repayments with suppliers and vendors. This will help in acquiring stock or inventory for the business. Good business credit will build trust with the vendors and they will be able to offer better options to you.
Having a business credit is also important to have a different medium for payments other than personal credit. Making business purchases from personal credit can negatively impact your credit score. Thus, it is important to have separate credit for the business.
Building business credit for loans
After understanding the importance of business credit for loans, it is important to move on to steps that are essential for building credit that can make acquiring loans easier for a company. These steps include:
Registering the Company
It is important to keep personal credit separate from business credit to establish a credit that is a sole reflection of your company’s spending and does not include any personal spending in it. Thus, the first step in building business credit is to register the business entity.
Employer Identification Number
After the registration process is complete, the next step is to obtain an employer identification number. The Employer Identification Number (EIN) is used by tax regulatory bodies such as IRS to track business for tax-related purposes. Similar to a social security number, the EIN serves as an identification number for the tax records of a business. This number can be obtained from the IRS website and is free of cost. It helps to establish business credit for a company.
Business bank account
The personal finances and those of a business must be kept separate from each other to maintain a distinguishable difference between the two aspects. Thus, it is essential to have a bank account that specifically deals with business payments. It is important to only use this bank account for business-related payments so that it becomes easier to track these payments. Opening business credit will also help to establish future credit.
Dedicated business addresses and phone number
It is also important to have a dedicated phone number and address for the business, where potential customers can reach out and get their queries answered. This will create a separate identity for the business and will help to develop the identity as well.
This is an important step toward building business credit since different business credit agencies take information from these directories. Another important thing to consider is that by setting up a business phone, you are establishing credit with the phone company. This will help in improving the business credit of the company.
Establishing trade lines with suppliers
Another important step in building business credit is setting up trade lines with suppliers and vendors. Establishing and maintaining a good relationship with suppliers and vendors will help in building business credit as more and more suppliers will join. It is important to build lasting relationships will vendors and suppliers that report to the bureau and will help to increase your business credit.
Keeping the information updated
Another important step is to ensure that the information is updated so that when someone pulls your business credit report, they can see your updated information. The more the profile is up to date and complete, the greater the chances of acquiring loans for the company.
Another thing that can be done is to keep an eye on the reports to get an understanding of the progress of the company. Further, this will help you to find any potential errors in the data that might have been negatively impacting your credit score. There is no specific period for monitoring these reports, but it is important to do it quarterly or twice a year to ensure the fact that the data is up to date and accurate.
Don’t borrow too much
It is also important to ensure that you are borrowing the amount, which is essential for the business and not more than you can return. Responsibly borrowing money can help the credit score of the company as it will ensure the fact that there is no negative reflection of it on your business credit score.
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Also read: How to Secure Capital for Startup Business
