Best Ways to Establish Business Credit as a Startup
When you take an interview to land a job, the recruiter analyses your skills to see whether you are suitable for the job, likewise a direct lender looks over your credit score to determine whether you can afford it or not. No matter why you take out a loan, you are going to undergo this process as it shows your ability to borrow money.
If you have ever taken out a short-term loan such as personal loans, bad credit loans or no credit check loans from direct lenders, you must be familiar with the term of credit. However, it will be different in case of your business.
Why take out money in the name of your business when you can get it in your name? First off, you will your credit score when the lender makes hard inquiries to determine your creditworthiness. Secondly, you are not likely to get what you need, and thirdly your finances will be on the verge of collapse.
Business loans come with greater amount, which means you can easily finance your big expenses like buying equipment, hiring staff etc, and you do not need to pay off in lump sum. Before you dive into how to build credit for your business, you must know about the term.
Experian and Equifax also maintain business credit report which includes the following components:
- Key facts of the business
- Registration details and contact information
- Summaries of collections and payments
- Outstanding debt
- The size of company
- Banking, insurance and leasing information
- Judgment filings
- Bankruptcy filings
- Tax lien filings
Your business credit report and score are completely different from personal credit report and score. The business credit report records all information related to your business. Whereas your personal credit score varies from 560 to 999, the business credit score ranges from 1 to 100. Take a look at the table given below:
|Score Range||Risk Description|
How should you build business credit?
Before you follow the following ways, you should establish a separate identity of your business along with a business address, phone number, and have a business account.
Establish trade lines with your vendors
Vendors and suppliers can help you develop your business credit provided you maintain a good relationship with them. Try to have contacts with different vendors, suppliers and lenders. If you continue to buy supplies, materials, they can allow you to pay a few days later after you receive the goods you ordered. Try to pay on time and in full and then request them to report it to credit bureaus. Suppliers and lenders often do not report good repayment history rather they wait for a default. If you successfully maintain a good relationship with them, you will at least have your business credit up.
Keep your information up-to-date
There are several credit bureaus that maintain business credit report and each follows different parameters. Make sure that all information in your report is accurate and up-to-date. You should check your report periodically to ensure there is no error in the record.
Make payments on time
The repayment history plays a paramount role to determine your credit score. Each default will show up and pull the score. Getting a business loan is quite difficult compared to personal loans. Your lender may turn down your application if your report shows high risk. Try to pay to suppliers and vendors on time. Your credit score is likely to be high if you make all payments in time.
Choose a lender that reports to business credit bureaus
Before you take out a loan, you must do research to know about the lenders who report to business credit bureaus. There is no use of repaying your debt on time if your lender does not inform of your credibility to business credit reference agencies. If a lender reports of your financial irresponsibility, they must inform of your good behaviour too.
Loans are tough to repay and hence you should borrow sensibly. First, analyse whether you need money or it is possible to put it off. If you need it, think of the amount you should borrow. You have to pay the interest on the top of the principle, so it is likely to cost you more than double of the amount. Make a budget to know about your affordability. Do not borrow if you cannot afford to repay.
Why is business credit score important?
As your personal credit score determines which credit card and interest rates you can avail, your business credit score helps vendors and suppliers decide whether they should work with you or not. They would like to do business with you only when your business is in a good track and you fulfil your financial obligations on time. With your good credit score, you can have a long-term relationship with your partners, which means long-run success.
The bottom line
Building a business credit score is not an overnight process. It takes forever. Build a responsible habit of borrowing, repay your debt on time, keep information up-to-date, establish trade lines with your vendors, and do not max out your credit card.