Indispensable Ways To Build Up Business Credits At An Accelerated Speed
Being a newly minted entrepreneur, you probably do not know the terms and their importance in the uncharted terrain of your business. However, if you are a veteran player in the industry, you probably have come across terms like business cash flow loans and business credits. You know how a strong credit profile opens up unexpected business opportunities for you. A strong business credit qualifies you to access some better and fast financing options.
On the contrary, small business owners have much on their plate that they hardly get the time to manage their daily business operations. But, they need to take out some time and understand the business credit terms and how a strong profile opens up doors of great capitals. This blog shares some valuable insights on business credit score and its importance for survival in the business market.
What is Business Credit?
Business credit score offers unparalleled advantages, and it is as important as your personal credit score. It is defined based on the business’s financial history. It ensures how efficient is your business finance to handle credits, including business credit cards, loans, and lines of credits. It is linked with the employer identification number of your business.
It is nearly similar to the personal credit scores but establishes the reliability of your business for the borrowers and loan providers. A good credit score defines your trustworthiness as a business entity. An added perk, you are eligible to get loans at low rates for a more considerable amount and also for the best deals of business credit cards.
How Does Business credit work?
All your financial activity attached to the EIN, be it the opening of the bank account, or acquiring a business credit card or paying the bills, everything gets recorded in the history of your business credit. All the records are submitted to the business credit reporting agencies and based on the credit reporting algorithm, they give a numerical value, which is your business credit score.
Every agency has its own ways of calculating the score, which is based on a standard evaluation method. The information garnered to these agencies provides a credit score on a scale of one to a hundred. The score table usually looks like:
|
Credit Score Range |
Risk frequency |
|
76-100 |
low |
|
51-75 |
Low to medium |
|
26-50 |
medium |
|
11-25 |
High to medium |
|
1-10 |
high |
Small business owners should realise the importance of the business credit score and start establishing a strong profile since the early days. In the next segment of this write-up, we have discussed essential steps to build your business credit.
Business Incorporation:
The first and the foremost step to start building your business credit is to register your company officially by submitting the necessary paperwork. If you are a solo entrepreneur, you need to register yourself as a sole proprietorship and incorporate your legal entity. By doing this, you get the ball rolling in your business credit court, and this also offers you legal protections. You have an option to choose between 3 legal structures for incorporation.
- Limited Liability Company (LLC): It is a process of incorporation that gives liability protection and financial separation between you and the business. It also offers more tax flexibility
- S Corporation: With this type of incorporation, only profits of the business are taxable at the individual level. The entities incorporated under this type are considered separate legal entities.
- C Corporation: C corporation type separates you and your business legally and financially. If you are planning to release your stock or go public, this type of corporation is ideal for such scenarios.
Get your Employer Identification Number(EIN):
It would be best if you get your business a federal identification number with the IRS. The process of application with the officials is online and quite simple and usually used to track your finances for taxation. For opening your business account, you will need an EIN or a social security number.
But providing your EIN is a better option because the payments and the bills are recorded in your business credit report. Additionally, when you apply for loans from the Australian Financial service accredited loan provider, you will need an EIN. Hence it is advisable to record all your business dealings under one roof using EIN.
Open a Business Checking Account:
As mentioned above, you need to keep your personal and business finances separate. Hence, it is necessary to open a business checking account and draw a line between your personal and business expenditures. This is one of the ways of securing your personal liabilities while you are doing business.
Another boon of having a business account is that your accounting becomes much easier. You will be able to keep the track record of all incoming and outgoing cash from the business and thereby mitigate the chances of facing cash flow problems. You get to generate the business credit report online and manage the accounting. A business account opens the door for building the business credits, which shall help in the future.
Note: You will need EIN to register yourself with the bank.
Report your payments received from the vendors:
In order to have a stellar business credit score, you need to keep your expense report crystal clear. We know that as a business owner, you will have multiple paths for the incoming of credits from the vendors, suppliers, and more. However, these payments do not automatically turn up on the business credit report.
You have to ask them to report your payments to the business credit agencies. You should ensure that the practice is being followed in your business organisation and you are actually recognised for the good behaviour that you are following. Also, if your vendor doesn’t follow the report policy, request them, or choose another one.
Get a business credit card:
Since you have multiple lines of credits, you need to have a business credit card. A credit card will facilitate you to bear the day in and day out business operation expenses. This way, you would be able to keep your personal and business finances separate and move towards the first step of building an amazing business credit score.
However, spending your credits thoughtfully is your responsibility. Also, since you are just taking baby steps towards establishing your business credit, ensure that you have good personal credit score for getting qualified for the business credit.
Don’t miss on making payments:
If you have followed the above-mentioned steps, then you are already halfway and have established a strong business foundation. You need to follow the same mantra as you have followed in maintaining your personal finances. Hence, it is imperative for you never to pile up the expenses for paying them later.
It will severely affect your business credit score and decrease your business reliability. Consequently, do not miss the payments, be it the rent amount, electricity bills, invoices, or your business cash flow loan payments. Ensure that you do not imbalance the credits and end up in a bad credit profile.
Keep up with the records from the agencies and review your personal credit reports:
Business credit bureaus collect various business information and have a different scoring method. Additionally, different lenders and suppliers report to them in a different manner. A disadvantage of having different lines of credit is, a lender or supplier may pull off records from the bureau of which you can lose the track record. Hence it is necessary to keep an eye on the finance credit reports registered with the agency.
At least once or twice in a year, make it a practice to check the reports and notify if any errors are found. The reason being, errors in the system affect your business credit score drastically. Also, while doing this, you can change or update the basic business information registered with the bureau. Thereby, you will be able to maintain accuracy in the business credits.
These are the benefits of having a stellar business credit score and trade efficiently in the market. This being said, you can also monitor and forecast the business cash flow and apply for commercial business loans or any other whenever required. Hence establish a good score and open the floodgates for funding and business deals.
