At some point, your small business may need to borrow money to grow. That means you'll be sitting down with a loan officer or applying for credit. Without a good business credit score, chances are slim that you'll get the funding you need.
Lendio, an online lending platform that connects small businesses to suitable loans products, has been very successful in helping entrepreneurs and start-ups in finding loan products. In fact, the company claims it achieves a 60-70 percent success rate in helping borrowers get the loan or financing they need -- versus a mere 10 percent for local banks -- by casting a very wide net for financial products.
The company matches eighty-five percent of borrowers that use Lendio to at least one borrowing option. What about the other 15 percent? Lendio CEO Brock Blake chalks it up to businesses with "bad credit" or, in some cases, start-ups with only "little bit of a track record."
Build Your Business Credit Score
To avoid falling in with the 15 percent, consider these five small business tips to establish business credit and to build a great credit score.
1. Nothing Personal, It's Just Business
Being passionate about your business and taking a very hands-on approach to its operation are typical entrepreneurial traits -- nothing to be ashamed of. Just don't let those strong connections with your start-up or small business bleed into your personal financial affairs, and vice versa.
When it comes to money, you need to cut the personal ties between you and your company. Intermingling personal and business finances could have a detrimental effect on your efforts to build business credit.
Stop putting business expenses on your personal credit card. Quit paying for equipment and supplies out of your personal accounts. If you must pitch more money into your business, make it an official loan with legal paperwork that you can only file if you follow the advice in Tip 2 below.
2. Let Your Business Stand on Its Own
Register your business as a separate legal entity. Depending on how you want to structure your business, this might mean exploring these three types of business incorporation.
To apply for a small business bank account or line of credit, banks typically require an Employer Identification Number (EIN). You can head over to the IRS and apply for an EIN.
These steps not only help keep your financial house in order -- and contribute a healthy work-life balance -- but they will also help shield you from personal liability, depending on how you set up your business. That way, a financial mishap, whether personal or business-related, doesn't risk wrecking everything you've built for yourself and your employees.
3. Apply Already!
There's no use putting it off. If you want to build good business credit, you need to apply and get approved for a small business credit card or loan. Be prepared to share financial particulars and answer some tough questions.
If possible, start small. When your business establishes a history of modest borrowing and paying off those obligations, you improve your chances of getting funded when bigger expenditures loom.
Also remember to look beyond your local bank, and don't get discouraged if you're initially declined. As we mentioned earlier, Lendio helps small businesses quickly survey the borrowing landscape to improve their chances of finding the right loan product.
4. Pay on Time
It may seem obvious, but its importance can't be overstated.
The key to maintaining a good relationship with your creditors and building strong business credit is to pay on time. It tells them that your business is dependable and signals that it is run reliably. Conversely, a string of late payments can send interest rates soaring when it comes time to borrow again, or maybe even lead to an outright rejection.
Also, keep balances low. This not only helps keep debt manageable for you, reporting agencies take the ratio of used and unused credit (among several other factors) to determine your creditworthiness.
5. Keep an Eye on Your Credit
Finally, monitor your business' credit score. Fraud and business identity theft are reasons enough to stay on top of your credit. More importantly, using a business credit monitoring service like Experian or Equifax helps you determine if you're on the right track. They provide a critical perspective: how you look to lenders.
It's also just plain responsible.
You're always monitoring the financial health of your company, anyway. Knowing your business credit score, staying current with the items that appear on your report, and correcting them if necessary, are all vital to keeping borrowing costs low and maintaining easy access to funding for those times when you really need it.
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