If yours is a small business, then you know there are ample things to manage at your end! But as you try to manage crucial tasks, you also might be interested to know on ways to generate business credit more so if you aim to scale up in the forthcoming years. Business credit takes time to generate. It also opens avenues to maximized capital growth.
Importance of business credit
Wondering why your business credit is essential? Akin to personal credit, a favorable business credit results in the lesser interest rate or insurance premiums. You can get easy sanctions for a business loan, lease or a business credit line. You enjoy better association with vendors.
When you build business credit, it will help to draw a line between business funds and personal finances. Once your business commences, you might discover it’s essential for you to sign a personal guarantee while opting for a business loan. The same may hold true while you open a business credit card. The “guarantee” here denotes that you will be accountable for any debt when your business can’t repay it. This situation can risk your personal assets. When you have a business credit, getting credit or business loans without personal guarantee becomes easy.
Ways to manage business credit
You’re already aware of the advantages of business credit. So now let’s find out the ways to generate and maintain the same, for a small business.
1. Keep a check on your personal and business credit
Does your business have credit? Are you aware of it? Don’t fret! There are many ways to evaluate the credit report for your business. Contrary to personal credit reports, today there’s no legal need for bureaus to offer you free access to the business credit reports. These bureaus will provide you with a complete copy of your business credit report in exchange for a fee. Hence, it’s crucial to know about generating personal credit. Some lenders might evaluate the owner’s personal credit. It is especially true for start-ups and small business. Others might evaluate business credit or both.
2. Create business credit
So, you didn’t find anything while checking the credit reports for your small business? If no, then the chances are that the business has no credit established yet. It could be true if you have been using your personal credit card to meet business expenditures. The payments are likely to roll up in personal credit reports. Even though a business-scoring model might create a business credit score depending on personal/business credit history and various financial data, others purely depend on data associated with your small business.
Hence, take the following steps for establishing business credit.
- Integrate your business. You could also form an LLC which will make sure that your business and personal identities are different.
- Opt-in for a federal EIN (Employer Identification Number). IRS offers this as a free service. It will make you count as a business entity.
- Open your business account with a legal business name
- Opt-in for a dedicated business phone connection under a legal business name
3. You can start to apply for a business credit card
To generate a business credit profile, you’ll require vendors and accounts that report the payments to credit bureaus. Hence, opting in for a business credit card is a favorable start. Furthermore, business credit cards come with several benefits. It also offers reward programs that are useful for small business owners than the rewards/features provided by personal credit cards. Today, there are ample business credit cards for small business and start-up owners to select from.
4. Work in co-operation with vendors who report the payments
There’s more you can do other than opening a business credit card! You can also establish your small business’s credit by creating accounts with vendors who report your payments to business credit bureaus. You will have access to vendors who pay on chosen terms. However, you can always ask if they report these payments. Just in case they don’t, shift to another vendor after you’ve verified the reporting initiatives and details.
5. Pay the vendors before time
You must have heard about the business credit score, on a scale of 1 to 100. This score entirely depends on your vendor payment record. When you pay on time or early, you can increase your chances of a good score. You might score up to 80. But what few small business owners might not realize is that to attain the best PAYDEX score, paying vendors early on is essential.
6. Utilize the business credit for managing the cash flow
One of the best benefits of generating business credit is that you are entitled to better terms and low rates with vendors. It in a way is useful for managing the cash flow, which is your business’s life-force. Use a business credit card to monitor your cash flow effectively. The grace period of a credit card might avert interest charges.
It will take some time to create your business credit. Hence, it’s crucial that you start early on! It could be that you’re unsure about opting in for a line of credit or loan. But when you generate your small business credit early, you automatically invest in creating a safety net as well. You have potential saving for the days to come. It will help you progress ahead comprehensively.
