12 Smart Ways for Small Businesses to Build Credit
Establishing business credit is crucial for any small business owner. Good credit means access to more financing options, better interest rates, and the ability to grow your company. Here are 12 effective strategies small business owners can use to build strong business credit.
1. Pay Your Bills Early
One of the easiest ways to build credit is by paying your bills early or even ahead of time. This shows vendors and lenders that you are reliable and able to manage cash flow effectively.
Aim to pay bills at least 5 days ahead of the due date whenever possible. This will help you avoid late fees and demonstrates that you are an organized, trustworthy business.
2. Incorporate Your Business
Forming a formal business entity like an LLC or corporation establishes that you are running a legitimate business. Be sure to obtain an Employer Identification Number (EIN) from the IRS as this serves as a form of business ID when applying for credit.
Incorporating also means your business will be rated independently from your personal credit score. This allows you to build credit specifically in the business‘s name.
3. Leverage Business Tradelines
Tradelines refer to each account listed on your business credit report. One fast way to establish tradelines is to become an authorized user on another company’s established credit account.
For example, some tradeline companies allow you to piggyback on their longstanding positive payment history for a fee. This instantly adds an aged, positive account to your newly formed business credit profile.
4. Apply for a Business Credit Card
Business credit cards are a prime way companies can safely make purchases and establish tradeline history. Look for cards that report payment activity to major commercial credit bureaus like Dun & Bradstreet.
Using a card exclusively for company expenses also simplifies expense tracking and separation from personal finances.
5. Build Relationships with Vendors
An underutilized technique is developing strong vendor relationships and negotiating terms in advance.
Contact critical suppliers like utilities, technology, software, etc. and request access to net payment terms. This allows more breathing room when paying invoices. Demonstrating consistent on-time payments also incentivizes vendors to increase credit limits.
6. Explore Financing Options
Beyond traditional loans, expanding businesses can leverage merchant cash advances, equipment financing, and other specialty lending products specifically designed for small business.
Taking out and repaying these credit products builds diverse, positive history with an array of lenders.
7. Become an Authorized User
Piggybacking on a trusted contact’s established account is a fast way to give your credit an instant boost. Ask a business partner or spouse with strong payment history to add you as an authorized user.
This links their account history to your report, increasing score and age of credit factors that determine approval odds.
8. Monitor Your Business Credit Report
Actively tracking your commercial credit reports ensures accuracy and helps spot potential issues before they grow. Accounts you didn’t open or errors can seriously damage a score.
Check reports from Dun & Bradstreet, Experian Business, and Equifax Small Business at least quarterly. Dispute any unauthorized or fraudulent activity immediately.
9. Keep Debt Levels Low
To maximize score, maintain credit utilization below 30% across all accounts. Using too much of total available credit limits signals higher risk to potential lenders.
Also avoid opening multiple new credit lines close together. Too many hard inquiries and new accounts over a short period impact scores negatively.
10. Know Your Numbers
Along with monitoring credit reports, small business owners should track the specific scores lenders use to evaluate approval odds.
For business credit, check the Paydex Score from Dun & Bradstreet or the FICO SBSS from Experian. Compare against industry averages and set goals for score improvement.
11. Optimize Account Mix
Having different types of credit accounts on your reports shows lenders you can handle various products responsibly.
Aim to establish a diverse mix of installment loans, credit cards, lines of credit, equipment leases, and merchant funding over time.
12. Prioritize Communication
If an emergency affects ability to make payments, being proactive matters. Call creditors and explain the situation right away.
Most will work with reliable customers by waiving fees or making temporary arrangements in good faith. Keeping open dialogue helps protect credit standing during uncommon hardships.
Building small business credit requires some effort initially but pays exponential dividends as companies scale. Following these tips helps proprietors start that foundation for sustained growth.
