At some point of doing business, you will need financing. One of the things that lead you to looking for business loans is expansion. Finance institutions will want to know how creditworthy you are as a person as well as how creditworthy your business is. That is why you must start building strong business credit as early as possible.
Getting a business loan has never been easy and from the look of things in the lending industry, it is not about to get easy. However, although it is hard to get your business loan request approved, it need not be impossible if you are smart. Banks are wary about lending small businesses money and that is why you must do everything possible to convince them that indeed, you do deserve to be advanced the loan. One of the best ways to do that is to show them that your business is a separate entity that is creditworthy, that is, it has always paid its bills on time and paid its creditors and suppliers without defaulting.
Here are a few tips to guide you a long the journey to making your business creditworthy:
The very first thing – establish your business credit
The first step is establishing your business credit. To do that, you will need to do a few things. Firstly, separate the business from yourself by incorporating it. Secondly, register it as a limited liability company (LLC). Thirdly, get a federal EIN – Employer Identification Number. Fourthly, open a bank account or two in your business names. Lastly, get a listed phone line for your business alone. After you have done all these, apply for business credit in the business name. Once you get it, all of your business transactions will be reported to Experian and you will be well on your way to building strong business credit.
Separate business finances and personal finances
If you have always been bailing your business out of tight spots with your personal cash, then lenders will not consider your business as creditworthy. In the first few months or years of starting in business, you may have to pay bills from your pocket. However, keep track of all these expenses so that you can transfer them to business accounts as soon as possible. The point here is to get your business onto its own line of credit as soon as possible.
You now have your business line of credit, that is, you have a credit card or two taken out on the business. You now have to build the credit score of your business. Like personal credit score, the higher the better.
Enhancing your business credit score
While there is no cast-in-concrete rule to improve the credit score of your business, there are a few strategies to use. Start by understanding a few things that the credit bureaus consider when they calculate credit score. They consider things like the number of trades/transactions, credit use, payment behavior, pending balances, patterns formed over time and the size of business among others.
Check your business credit reports thoroughly to make sure that all information is up to date and accurate, same as you do with your personal credit report. Make sure that your suppliers report all trades that you perform with them. If they do not report trades to Experian, do not do business with them. Seek businesses that report trades and transact with them henceforth. Also, make a point of paying your creditors on time all the time. Credit bureaus consider history of payments when calculating credit score.
Monitor your business credit
You have to keep on top of your business credit all the time. Depending on many things, one of them being the number of trades that are reported at any given time, the credit score will never be constant. It will change from time to time. Some of these changes could affect the score negatively.
Keep a keen eye on your business credit report to ensure it is complete and accurate. If there is need for rectification, you will have time to do it if you always stay on top of your business credit.
Maybe you can hire a credit monitoring firm to do the job for you. That way, you will know who is asking about your business, you will stay current on your business credit status and you can be able to protect your enterprise from business identity theft.
It is important that you always know what lenders will see when they ask for your business credit report. That way, you can even guess beforehand what their response will be when you borrow a business loan. In addition, business credit is not only good for borrowing business loans, but suppliers also request for the same from the credit bureaus before they can do business with you.
Finally, get a DUNS number
A DUNS number is important although many business people forget it. It is a special nine-digit number for the location of your business and it is offered free of charge by DUN & Bradstreet. This identification number is unique to your business only and it is accompanied by a PAYDEX score which starts at zero and increases depending on how promptly you pay your bills, creditors and suppliers. Finance institutions may ask for your business PAYDEX score before giving your business a loan. PAYDEX is to a business what the FICO score is to a person.
By following the above guidelines for establishing, building and monitoring business credit, you will improve your chances of getting a business loan. However, good business credit score is not the only determinant. Finance institutions will consider other factors like how long your business has existed, performance, what you intend to do with the loan and so on.