Lessons From Entrepreneurs On Building Business Credit
You're probably super excited if you're an entrepreneur who has just started a new business. Your ideas are probably flowing, and you're thinking about how much money you're going to earn with your company's endeavors. You'll get everything you need on credit because businesses automatically get a lot of credit, right? No. On the contrary, businesses sometimes have a more challenging time getting credit than individuals do. Business credit is something that you have to build over time in similar ways to building your individual credit. Here is some information about business credit and how you can work your way to achieving a profile that attracts business credit lenders.
What Make Your Business Credit Grow
Business credit involves funds or lines of credit that a lender gives to a business entity. It's different and the same as personal credit at the same time. It works the same way except that the responsible party is the business entity that borrows it instead of the individual person. However, in many cases, the individual who handles a business's finances is the same person who owns it. Such is the case most of the time in a sole proprietorship situation. In other cases, the business is an entirely different entity from the owner and their individual credit. If that's your situation, then you will need to build your business credit from scratch.
Why You Need Business Credit
The Difference Between Personal Credit and Business Credit
Personal credit and business credit are similar to each other in a lot of ways. The main difference, however, is that personal credit traces back to your social security number while business credit is tied to an EIN in most cases. Both types of credit usages may be reported to a bureau that will help lenders decide whether they want to provide you with loans and such.
Your business entity needs to have credit, especially in the younger years of the business's development. As a business owner, you might not always have the cash to pay for some of the things your business needs. For example, you might need to purchase new furniture or equipment to make your business run more efficiently. You might need a loan to pay your payroll expenses during a month of downtime. Maybe you want to expand your business by opening up a new location. Business credit can help you do those things so that your business will grow. You should have business credit even if you don't think you'll need it at the moment. You'll never know when a situation might arise that will require you to have such credit.
Whether you want to open a personal or a business credit card, the most important thing, and the one to begin with, is to find a suitable lender. Below we have some options for you:
Types of Business Credit
Several types of business credit exist that you might need to obtain to navigate your business more efficiently. These are some of the most common business credit types, some information on how they work, and why you might need to obtain them.
Small Business Loans
A small business loan is usually a large sum of money that comes from a traditional commercial finance entity. It's meant more for small to medium-sized businesses than it is for enterprises. Your company may need a small business loan for expansion, cash flow, inventory, or equipment. You may want to borrow funds to improve your interest on another loan that you have in some cases. All such reasons are legitimate reasons to apply.
To qualify for a small business loan, you'll have to provide something to the lender proves that your business is an entity. You will also have to provide statements that support the claim for how much income you receive from business proceeds. Some of the documents you may need to produce include your EIN statement, a business license or permit, a tax return, or a bank statement. All of those items can help you obtain approval for a loan you desire.
Types of Business Credit
Several types of business credit exist that you might need to obtain to navigate your business more efficiently. These are some of the most common business credit types, some information on how they work, and why you might need to obtain them.
Small Business Loans
A small business loan is usually a large sum of money that comes from a traditional commercial finance entity. It's meant more for small to medium-sized businesses than it is for enterprises. Your company may need a small business loan for expansion, cash flow, inventory, or equipment. You may want to borrow funds to improve your interest on another loan that you have in some cases. All such reasons are legitimate reasons to apply.
To qualify for a small business loan, you'll have to provide something to the lender proves that your business is an entity. You will also have to provide statements that support the claim for how much income you receive from business proceeds. Some of the documents you may need to produce include your EIN statement, a business license or permit, a tax return, or a bank statement. All of those items can help you obtain approval for a loan you desire.
Supplier and Vendor Accounts
A vendor is an entity that will provide you with goods for your business. The good will vary based on the type of business your run. If you own a restaurant, you might have a vendor that supplies you with certain meats, for example. You may get janitorial supplies from a vendor if you own a cleaning company. Office supplies are other items that you might receive from a vendor. You get the idea. Your vendors might allow you to receive products on credit if you prove that you are trustworthy enough to make your payments on time. Vender accounts are excellent accounts for building business credit. In fact, you may be able to qualify for a starter account if your business is relatively new. Starter accounts allow you to prove to a provider that you are responsible and prompt enough with your payments to deserve additional credit at a later time.
Lines of Credit
A line of credit is different from a loan in that you don't directly receive cash. You receive a credit line for a certain amount that you can generally charge for the items you desire. In most cases, you cannot pull cash from a line of credit the same way you can with a small business loan. In other cases, you can. A line of credit is a good financial product to have as a business owner. You will need to meet certain criteria to qualify for a business line of credit. For example, the lender may require that your business earns $10,000 to $40,000 in monthly revenue. It may ask that you only apply if your business has been open for one full year. Some providers want you to have a credit score of 580 and above, as well.
Business Credit Cards
Business credit cards are similar to regular credit cards in the way they operate. They do have some differences, however. A business credit card might offer you a much higher limit than a personal credit card might offer you, for example. You may also be privy to special perks and benefits that don't exist on personal cards. You can apply for a business card even if you don't own a business, but the card is most likely designed to provide your business with an amazing benefit, such as a flight discount or free Wi-Fi service.
Merchant Cash Advances
A merchant cash advance might be something you're interested in on your journey of building business credit. A merchant cash advance is a special type of advance that forgoes the credit check in most cases. You can get a merchant cash advance by showing a provider that you meet the monthly income requirements. Bank statements and consumer payment receipts could help you to get the loan. Merchant cash advance lenders don't look at your credit score. They instead look at the potential that your business will earn money to repay them in the future. It's unique because it looks at future income as opposed to past income. You can start building business credit if you receive approval for a merchant cash advance. Pay it off as quickly as possible, and it could open doors for other financial products.
How to Establish and Grow Business Credit
"Building" business credit is important because it can help you to stay afloat and maneuver your company in the business world. Therefore, we wanted to make sure that we gave you some tips on how to build credit from scratch for your business. Read through these tips and then go through the process. You might find that you can access quite a few business credit products once you exhaust all of these methods.
1. Register Your Business
The first thing you will need to do if you want to start building business credit is to register your business entity. Depending on how you register it, you might be able to separate your business finances from your personal finances. You won't be able to do that if you register your business as a sole proprietorship. That's the one downside of being a sole proprietor. It's easy to set yourself up for a business, but your personal finances remain tied to your business finances. Thus, lenders will go by your personal social security number when you request loans and advances. At any rate, you will need to choose a "doing business as" or DBA name and register that name to get started.
2. Get an EIN
The next thing you should do if you want to start building business credit is to apply for an employer identification number. The IRS can issue an EIN to your business rather quickly. In fact, you can apply for an EIN online in a few minutes of time. If approved, you will be one step closer to building business credit for yourself. It's free to apply for an EIN if you go directly through their website. Don't get sidetracked by third-party companies that try to sell you expensive EIN applications. Go directly to the issuing entity and save money.
3. Open a Business Bank Account
Opening up a business bank account is another great way to get yourself on the map as a new business entity. Once you get your EIN and your registration and licensing, you can take those documents to a bank and request to open a business bank account. Now, you'll be more visible as a business entity. You will have a bank account with your business's name on it, and you will be able to separate your business expenses from all of your personal expenses. Having a business account will help you with the organization, as well. Potential lenders will also see you as more legitimate when you set up a business banking account. You can use the statements from your business checking account to show them how much money comes into your official business, for example.
4. Order Your Credit Report
If you are a sole proprietor, your business dealings will not be separate from your personal dealings when it comes to finance. Therefore, you will need to ensure that your credit is as clean as possible before you try building business credit. What you need to do is order a full credit report from the three major credit bureaus. You will then need to review your credit report for any information that needs to be corrected. For example, you might notice that the balance on one of your accounts is incorrect. It would be smart to contact the credit bureau or the lender to have it fixed because it can ultimately prevent you from establishing yourself as a reliable business. You'll also need to look for bogus accounts, incorrect inquiries, and accounts that do not belong to you at all.
You can open a case with the credit bureau if you feel as though something on your report is not correct. The credit bureau will have 30 days to decide whether your claim is legitimate or not. It will remove any accounts that are proven to have incorrect balance information or incorrect account owner's information. Your credit score can rise drastically just by having one account balance changed or an account removed completely. You'll want to invest the time in having your situation looked into by the credit bureau. It will put you in a much more positive situation when it comes to applying for business credit and gaining approval.
5. Get a DUNS Number
Businesses have a separate numerical identification system than individual persons do. The government does not manage this system, and it is not mandatory for you to have one. However, it can help you receive business credit and establish your new business entity. The number that you need to apply for is called a DUNS number. The number stands for "data universal number system." It's similar to a social security number except that it pertains to a business's credit profile. You can apply for a DUNS number by visiting the Dun & Bradstreet website. It will take approximately 30 days for you to receive the number, but it can help you immensely.
6. Apply for a Business Credit Card
You can apply for a business credit card once you have all of your registrations, bank accounts, and identifiers. It's best to conduct a search and do a complete comparison tool so that you don't waste any unnecessary inquiries on credit that you might not receive. Make sure you know the odds or likelihood that you'll get the card before you apply for it.
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7. Apply for a Starter Vendor Account
You can also establish business credit by opening a starter vendor account. Starter vendor accounts come from vendors who are willing to take a risk on new business entities. You might be able to get approved for a starter account for some items that you need to run your business. You can start building business credit with them immediately and show potential lenders that you can be trustworthy.
8. Make All of Your Payments on Time
Making all of your payments on time is vital to any credit score. Your timely payments will boost your credit score and keep it afloat while you're in business.
9. Pay More Than the Minimum Payment
You should also pay more than the minimum payment required if you want to build business credit. Paying more than the minimum amount will allow you to finish your financial obligation much faster. The best strategy is to double up on your payments each month. If you can't afford to double your minimum payment, you can pay the minimum plus the amount of interest the company charged for that month. Then, at least the full payment will go to your principal balance. A lot of people lose most of their payments to interest, and it seems as if their loan repayment lasts forever.
10. Speak to a Financial Advisor
The final tip for you is to speak to a good financial advisor. The financial advisor can brainstorm with you and help you think of additional ways to improve your reputation with potential business loan lenders and similar entities. It's always wise to have a financial adviser in your corner whether you're a business or individual entity. A financial advisor has many years of experience, and this person can give you tips for building business credit that you may not have been able to find elsewhere. Search for a financial advisor through a reputable company that truly cares about helping you stay on track with your business funds.
Contact Us for Business Credit Assistance
We hope that you found the information you received in this article helpful. You can contact us if you have any questions about business credit or how you can obtain it for your venture. We are not a lender, but we can connect you with lenders who will help you. We are a consumer advocate who loves helping individuals and business owners with their financing needs. We also provide an assortment of other services and resources in the financial realm. Nothing is outside of our expertise. Contact us to speak to one of our financial advocates who can help you get the financing or information you need to succeed.