Cash flow poses one of the largest problems for small businesses today, reports Bankrate.com, and a poor cash flow can hit anyone. Both struggling and flourishing companies alike can find themselves strapped for cash. Luckily, if you can build business credit (also known as commercial credit), you can help your small business access cash when you need it.
When it comes to credit, small businesses beware: business credit can help you grow and save you from a sudden bind—but it can also drive you into debt. You should always use your business credit carefully to keep your interest payments from ballooning. With that said, your small business may benefit greatly if it were to build business credit. According to the Small Business Administration (SBA), more than 65 percent of businesses use credit for their operations. To help you get started, here is a guide on how to build business credit:
Build Business Credit: The 5 Secrets to Doing It FAST
1- Register your business
Many small business loans are personally financed by the owner. If you are the owner, the interest rate on a business loan will be directly determined by your credit history, including your mortgage and car payments. Before you can apply for a business line of credit, you should have an established, registered business. You will have to select a legal designation and classify your business as a sole proprietorship, partnership or corporation.
In order to register your small business, you will need to establish your business as a legal entity, register your business name, and obtain a federal tax identification number, also known as an Employer Identification Number (EIN). A business’ EIN works very much like a person’s social security number, acting as a unique identifier for government purposes. For more information, check out the SBA’s 5 Steps to Registering your Business. Note that each state has its own laws regarding small business registration.
2- Start a business bank account
Banks prefer to provide a business line of credit to a company that has a positive financial track record. To apply for business credit, you will usually need a business bank account that is at least 2 years old. As such, you should open a business bank account as soon as possible. Business bank accounts help you build business credit (as opposed to personal credit history), and a business bank account helps you keep your personal spending separate.
3- Build business credit history
You have a personal credit history that results in a credit score, which essentially tracks your debt repayment history. Businesses likewise have a credit history and a business credit score, and these important reports are provided by business credit bureaus. Once you have an EIN, check with the business credit bureaus to make sure your company is listed. Major business credit bureaus include Dun & Bradstreet, Experian Business and Equifax Business. Once you apply for a business line of credit, the bank will consult with these bureaus to determine your credit worthiness.
You can build business credit with almost all of your business transactions, such as using your business credit card or establishing credit with vendors. Make sure to keep your balances low and pay them off on time, or else you will have trouble establishing a business line of credit in the future.
4- Apply for a business line of credit
Once you have built a good credit history, you may be ready to apply for a business line of credit. Before you apply, you should compare interest rates and terms from different prospective lenders. Applications require a good deal of documentation, including a report of your annual gross revenues, your business history and bank records.
When considering your application, lenders will assess your credit worthiness. The Federal Reserve Bank of New York writes that banks will analyze the “Five C’s:” capacity to repay, capital, collateral, conditions (intended purpose of the loan) and character of the borrower. Small business owners’ personal finances will also be taken into account. As such, keep in mind that establishing a business line of credit relies on your own personal credit history.
5- Stay patient
When you aim to build business credit, it can take a long time. You may find yourself facing a good deal of red tape. While the process may be frustrating, just remember to stay patient and spend responsibly. One day, a business line of credit may be just the boost your small business needs.