Many small business owners don’t know that business credit exists, or if they do know about it, they do not understand why it’s so necessary. Missing this might mean missing out on beneficial financing, contract and business development opportunities.
In celebration of National Small Business Week, Nav and Startup Nation hosted a webinar for business owners where I presented an motion plan for building and leveraging business credit.
Here are the most vital conclusions from this event. You can watch the entire recorded webinar here:
Why business credit matters greater than you think
A loan for firms is not only about obtaining a loan. This impacts many points of your online business operations:
Insurance: Insurance firms may check a business’s creditworthiness when evaluating business insurance applications. One business owner discovered that he was denied insurance because of misinformation on his company’s credit report, which was mixed with one other company. He fixed it and moved on to get the insurance he needed.
Contract possibilities: Government contracts and large business clients may require a deposit or special insurance or each, which can involve checking the company’s creditworthiness. Or a business customer can perform a credit check to help understand whether the company is able to take on the order.
Financing options: Whether you are looking for SBA loans, equipment financing, or vendor credit, the application process may require a strong business credit history or good credit scores.
Understanding the business lending landscape
A business loan works in a different way than a personal loan in several key ways:
Main players
The three major credit bureaus are:
- Experia company
- Dun and Bradstreet
- Equifax company
Additionally, the Small Business Financial Exchange (SBFE) aggregates payment data from major lenders and makes it available through business credit bureaus.
Key differences from a personal loan
- Anonymous reporting: Business credit reports typically do not include business names, only account types (reminiscent of utilities, bank cards, etc.).
- Daily tracking: Business credit uses “days out of terms” to report payment history. This is different from a personal loan, where your payment history is often in 30-day increments.
- Various scoring ranges: Each office uses different scoring models with different ranges, so a good rating varies from office to office. See the hottest business credit rating ranges here.
Building a credit foundation for your organization
Step 1: Establish a business entity
While you possibly can build business credit as a sole proprietorship, forming an LLC or corporation offers significant advantages:
- Legal separation of private and business funds
- An easier transition when building your credit history
- Better protection for your personal assets
Step 2: Make Your Business “Legal”
Creditors need to check whether your organization is legal and stable:
- Get a physical address: You can use your house address if it makes sense for your online business, but you will likely need a different address to use as your mailing address on web sites and other public sources.
- Secure your organization phone number: Maintain skilled communication channels. Check out Verizon’s small business plans business[1] .
- Create a business email and website: Create a digital presence with your individual domain.
- Get an EIN: This free tax identification number helps you match your credit history to your online business.
Get Nav for free A checklist to keep your online business legal
Step 3: Know your industry
Industry codes (SIC or NAICS codes) affect your financing options. Choose the code that best represents your major source of income. The Census Bureau offers free tools to help your online business understand NAICS codes.
Step 4: Build credit with trade lines
Trade lines are the basis of business credit. These are the accounts that report your payment history to the credit bureaus:
Start with supplier credit: Many suppliers offer Net-30 accounts where you should buy now and pay inside 30 days. When you pay on time, they report this positive payment history.
Check out Nav Prime: Receive your credit reports and business credit scores along with your personal credit data, updated monthly. Nav Prime sends your monthly payments as a trade line to the major business credit bureaus.
Use corporate bank cards: Most small business bank cards report to at least one credit bureau and can enable you quickly establish your credit history.
Best practices for building credit
Pay on time, every time
Business credit is extremely sensitive to payment timing. Being even a day or two late can negatively impact your credit. Set up automatic payments or alerts to avoid missing deadlines.
Strategic moment of payment
Don’t pay your bills too early. For example, if you pay your Net-30 account inside 3 days, it could only show as “current” and not as energetic. You might want to consider paying after the company reports the accounts to the credit bureaus to show activity. (Check with your supplier or card issuer to discover when they report.) But all the time pay on time.
Monitor and correct errors
Previous studies have shown that roughly 20-25% of business owners find significant errors on their credit reports. Check your credit rating commonly with all three bureaus and dispute any discrepancies immediately.
Beware of UCC liens
These are public notices that a lender has an interest in securing your organization’s assets. Lenders do not all the time declare loan repayments, so monitor your reports for outdated liens.
Personal credit connection
When building your online business credit, don’t neglect your personal credit:
- Many business loan applications still require an in-person credit check
- Some loans (like SBA loans) all the time perform a credit check
- The FICO SBSS rating combines personal and business credit data for certain lending decisions
Important tip: Track your credit utilization on each personal and business bank cards to maximize your results.
Why business bank cards matter
Business bank cards are often the most available type of credit for recent businesses:
- Often available to very recent businesses
- Typically check your personal credit and income from all sources
- Some offer 0% introductory APR periods of 7-18 months
- Provide strong fraud protection
These advantages make business bank cards a solid selection if used rigorously. Be careful though. Debt can quickly turn into overwhelming if you are not careful.
Taking motion
Building business credit takes time and consistent effort, but the rewards could be price it. Start with:
- Establishing business foundations and infrastructure
- Applying for a first line business or business bank card
- Consistently making payments on time
- Regularly monitoring your credit reports
Remember: the sooner you begin building business credit, the more advantages it is going to bring to you over time. Don’t wait until you wish financing – start building your credit foundation today.
Additional resources
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