Why Your Business Credit Score is Important and How You Can Establish It
Unless you are starting your small business with a ton of personal cash that can cover everything you need, then you will most likely need to borrow money to get it up and running. Even if you do, at some point as your business grows you may need some extra cash to pay the bills and pay your staff. However, you can’t do that if your business has a poor credit score.
A business credit score is just like your personal credit score. Lenders can check to see how reliable you are at paying off debts to decide if and how much they can lend to you. What you might not realize is that other entities may also check your business credit score for reasons other than lending. Suppliers and parties that may want to get into business with you can view your credit score to decide whether or not they can rely on you as a customer or partner. This makes it incredibly important to have a good credit score, even if you don’t plan on borrowing money any time soon.
Establishing Business Credit
It can get tricky to establish a credit score and maintain it when you are a startup. While it’s true that a lender may look at your personal credit score to determine whether or not to lend money to your startup, eventually your business will have to stand on its own two feet. Plus, if your personal credit isn’t immaculate, then you will find it hard to get those funds. You will need to build up to get to a point where lenders will trust your business. Here’s how.
Make All Payments on Time
As a startup, you will have bills no matter what. You will have monthly utility bills, web hosting fees, marketing costs, suppliers, and anything else that is required for your business. It’s best to work with other companies that will report your payment history to the credit bureau. Of course, the best thing is to make your payments on time and in full so that you will be seen as trustworthy and reliable. Being late or making partial payments will only harm your score and tell lenders to stay away.
Borrow Even if You May Not Need It
There are many people who will apply for a credit card just to build their credit history. They will set up some automatic payments and pay it off every month without building up debt but also demonstrating they can make payments. As a business, you can do this too. One of the best ways is by getting a business line of credit. A line of credit is similar to a credit card in that you have a limit to which you can draw funds. You only pay interest on the funds you use, and you can pay it back to use it again. Using a small amount and paying it off every month will help you build your score.
Nowadays there are more options than ever for borrowing funds at an affordable price. Online lenders do not have to pay for brick-and-mortar locations and all of the costs associated with having a physical location. They are able to lend money at lower fees and interest rates as a result. If you are borrowing to build your credit, you don’t want to pay out the nose in fees, which makes an online lender a great option.
Make Your Business Official
Of course, you can’t build up the credit of your business if it isn’t an entity in and of itself. You need to register your business with your state. You will need to provide a unique business name that nobody else will be able to use from that point on. This will allow credit agencies to start a file for your business under that name and begin collecting information. If you do not take this step, then there will be no reference point for your business for the agencies to work with. You might make all your payments on time, but it will do no good in establishing or building your credit score.
While it won’t happen right away, within a few months credit agencies will start collecting data related to your score. As time goes on, your score will rise and fall depending on your payment habits. As long as you are making them on time, then your score will be good enough that you will have no problem borrowing or working with other parties.