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How to Build Your Business Credit: A Step-by-Step Guide from The Business Cowboy

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Small businesses often struggle to get financing when they need it most. Without a track record of credit or collateral, loan options are limited. However, there are other ways to fund your business without coming up empty-handed. Business credit is another funding option small businesses can use to get capital in the early stages of company growth. A company’s business credit can be broken down into two categories: personal and business. Personal credit includes things like your personal credit history and score, as well as any loans you have taken out as an individual. Business credit is all about your business’ financial credibility and reputation as a trustworthy loan applicant. We’ll explore both types of business credit in this article, so you know exactly what value they have for your company moving forward.

What You Should Know About A Business Credit?

Credit is a financial resource used to purchase goods and services before the money is actually paid out. Business credit allows you to purchase goods and services on credit, then pay off your debt later. Most businesses use credit to get much-needed capital when cash flow is low or nonexistent. Credit can also be used to buy inventory, hire vendors, and purchase equipment. Business credit is also referred to as trade credit, commercial credit, or supplier credit, and is what a company uses as proof of payment when they are not paid on time. A business credit rating is a three-digit number (like 634) that is designed to provide information about the business’ ability to repay its debts.

How to Build Your Business Credit

Building a business credit starts with good financial management and control practices, such as maintaining efficient cash flow and keeping accurate records. Here’s how to build your business credit: 

  1. Establish Company Credit – Establishing company credit begins with creating company credit and financial standing. This includes filing for a business license, acquiring necessary permits and licenses, getting your business name and trade name registered and maintaining a positive cash flow. 
  2. Obtain a Tax Identification Number – A Tax Identification Number (TIN) is a 9-digit number that identifies your business for tax purposes. Registering for a TIN will also allow you to open a business bank account, which is critical for managing your business credit. 
  3. Choose Your Business Type – The type of business you operate will determine which government agencies will affect your business credit. For example, if you provide a service, you will be under the jurisdiction of the state’s Department of Labor. If you manufacture goods, you will be under the jurisdiction of the state’s Department of Commerce. 
  4. Stay Current on Taxes – Paying your taxes on time and in full is critical to building business credit. If you don’t pay your taxes on time, you may receive a warning from the IRS. If you don’t pay your taxes at all, you will receive a lien against your assets and your business credit will suffer. 
  5. Get a Business Credit Card – The best way to start building business credit is to obtain a business credit card. Some credit card providers will require you to have a business name and Tax Identification Number in order to open an account. 
  6. Obtain Trade Credit – After a few months of using your business credit card, your credit report will be generated. This is your first glimpse into your business credit. Keep in mind that your personal credit history is not affected.

Why is Business Credit Important?

If your business relies on third parties, suppliers, or customers to buy from and sell to you, you need to have a business credit rating that’s high. The higher your business credit rating, the more likely you are to receive loans and favorable payment terms compared to those with lower ratings. If your business has a low credit rating, you’re more likely to be declined for loans and find that suppliers demand on-time payment with a penalty to offset risk. Additionally, if your business uses third-party credit services such as e-commerce platforms that accept credit cards, suppliers that offer payment terms, or vendors that offer loans, they will likely raise your rates or decrease your credit limit because of your low credit rating.

Types of Business Credit

There are several types of business credit, each of which has different uses, benefits, and risks. Understanding each type of credit and how it can benefit your business can help you make informed decisions about financing your business. You can learn more about these from The Business Cowboy so you can take full advantage of it. Listed below are some types of business credit that you should know.

  • Receivables – This type of business credit is when someone owes your business money. It is often established with suppliers or vendors who sell your products on credit and are paid either monthly, quarterly, or whenever they’re due. 
  • Trade Credit – Trade credit occurs when you purchase products or services and pay for them later. This can be done through barter or with a cash down payment followed by a payment schedule. 
  • Commercial Credit – Commercial credit includes the use of credit services such as commercial paper and factoring. Commercial paper is an unsecured loan that allows you to receive a lump sum upfront for goods or services you will provide within the next 90 days at a prearranged interest rate. Factoring is a service that gives you a cash advance for an invoice you will send to a client within the next 90 days.

Bottom Line

Business credit is a great way for small businesses to get financing when a bank loan is not an option. It’s important to establish a strong credit history from the start to ensure you receive favorable financing terms and stay debt-free. Building a business credit is challenging, but it can be done with patience and persistence. The more successful you are in managing your business finances, the better your business credit will be.