Fastest Way to Establish Small Business Credit

06 Oct, 2016 / Comments: Comments Off on Fastest Way to Establish Small Business Credit / By

Establishing business credit is a critical component for any small business that is trying to get off of its feet. Doing so will help you to keep your business and personal credit separate and you will have the advantage of having good business credit even if your personal credit is lacking. Additionally, it shows separation between the business and the owner. However, establishing business credit is easier said than done. Let’s take a look at the fastest way to establish business credit. Keep in mind that a personal credit score will range from 300 to 850, whereas a business credit score ranges from 0 to 100, whereas 75 or higher is considered to be an excellent credit rating.

 

Make Your Business Legitimate

If you haven’t done this already, you’ll need to make your business a separate legal entity within your state. This requires that you either set up an LLC or S-Corp or incorporate it. Once you’ve done this it’s important that you apply to get an Employee Identification Number (EIN). You can do this through the IRS’s website. This will show banks that your business is legitimate and increase your chances of being approved for a credit line.

 

Obtain a Line of Credit with Suppliers or Vendors

You may have already established business relationships with vendors or suppliers such as Staples, Office Depot, FedEx, UPS, etc. It’s a good idea to see if any of them would be willing to extend you a small credit line. You’ll find that most will be willing to do so as they want to keep you as a loyal customer. Just ensure that they send your payment history off to the business credit bureaus, as it is reported voluntarily and not all of them will do so. In the best case scenario, you’ll be able to establish between three and five of these kinds of accounts so that your business credit profile gets filled up and your business credit report will seem more active.

 

Use Trade Credit to Your Advantage

Trade credit is a type of business-to-business credit that is considered the largest source of lending around the globe. It can be an extremely valuable resource when you’re handling suppliers or vendors or even furnishing your office. If you use trade credit, the most important thing is that you pay it back in full and on time so that the creditor will turn in a positive payment history to business credit bureaus. However, as long as you do so, this can be an invaluable tool to establish business credit.

 

Your Personal Credit Matters Too

Stay aware of your personal credit rating. In fact, the largest factor in most banks’ decision to first lend a business funds are the owner’s’ personal credit score. In order to boost your credit score, ensure that you pay your personal bills on time in order to maintain a low debt ratio. Additionally, ensure that any balances you have remains under 30 percent of your credit card limit at all times.

 

Apply for Business Credit Before You Actually Need it

As a start-up it’s a good idea to start building a business credit history before you actually need the credit. To do this start building your credit right after you start up. Keep in mind that a small business often needs to establish itself for at least two years before a traditional bank will feel comfortable offering it a credit line. The good news is that there are ways to get past that such as obtaining a business credit card or a small bank loan. If you’re having difficulty even obtaining a small business loan, then you can try getting a store-based credit line or a small secured credit card that has a lower limit.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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