Building Business Credit Scores

To be able to avail of many financing offers by many lenders, having a good credit score is a must. If you have one handy, this will allow you to get a decent amount with reduced interest rates, with flexible payment terms.  But building your business credit score is no easy feat to accomplish.

If you just have started earning your business credit when you set up your business venture, then it’s quite easy to get a good rating within 1 to 2 years of its operation.

This is not the case, however, when you have a bad credit rating. You either have to repair your business credit on your own, or hire a credit repair professional to get the job done. Only when you fixed your score can you start to build it up.

But before you can actually start building business credit scores, you need to have a credit identity first. This can be done by putting up your business as a corporation or an LLC. These two are perfect statuses to start your business credit. Since most financial lenders are eyeing clients in corporation or LLC, having your business as one will allow you to get a loan faster than any business enterprise.

You also need to set up a credit record with a credit agency, or Paydex. Credit agencies will keep track of your credit transactions, rate them and give them scores. This will be used to determine how good your credit rating is when a financial institution does a credit check.

Paydex scores by big companies like Dun and Bradstreet will keep records on how well your company is paying your credit bills. The score ranges from 0 to 100 – the higher the score, the bigger the possibility your loan will get approved.

Now that you have established your credit identity, you need to apply for a loan before you can actually start building your business credit scores.  First, you can choose either a secured loan, where the lender will ask you to pledge assets or properties as collateral that will serve as security for the loan. Note that this kind of loan will let you borrow a much larger amount (depending on your collateral), and a much reduced interest rate.

Another type of loan is the unsecured loan, which is perfect for those who don’t want to put their assets at risk by setting it up as collateral. Since the risk to the lender is higher compared to unsecured loans, the financial institution might be very strict with its application, coupled with a higher interest rate and payment schemes.

Next is the type of credit you want to be used in your business venture. Below are the most common credits you can bring out in any lender in your area:

1. Business credit card

Quite separate from a personal credit card, this type of credit is more lucrative to be used in business ventures due to its reduced APR, and flexible interest rates (depending on the amount used within the month).

2. Short/Long Term Loans

These kinds of loans allow you to borrow a fixed amount of money from the lender to be used in any way you wish. Attached with fixed interests with payment terms ranging from 5 to 10 years depending on the amount borrowed.

3. Lines of Credit (LOC)

Lines of credits are more for business who are into operation 2 years or more. Credit lines will let you have a fix amount of credit on the bank, which can be used to pay for unexpected expenses that crop up during the operation of your business. The interest expense will depend on the principal amount you have left, and will reduce as you pay your debt until it reaches zero.

Establish Your Business Credit

It is very important to establish your business credit scores to be able to avail of financial loans to fund your small business. In truth, small enterprises are now clamoring about for loans to improve their business by using the money for improvements, or purchasing inventory to meet consumer demands.

Strengthening your business credit takes a lot time and effort, and requires a paper works by the dozen. Here are some tips on how to get started in giving your business credit rating a healthy boost:

Set a business identity first

The first step in improving your business credit is to get one in the first place. This can be done by registering your business as an LLC or a corporation. Next you need to provide all the necessary paper works required by lenders such as legal document like business permits and licenses, financial statements, references, contracts, and so on.

You need to keep in mind that when you register your business as an independent entity, you need to have a fixed address of your business, as well as open lines of communication. (Note that P.O. Box is not acceptable as a business address)

You might also need to register your business in a credit agency so they can keep tabs on your credit ratings and scores. These organizations will act as reference when you apply for a financial loan that requires a valid credit report.

Racking up your credit status will depend on the financial stability of your business as based on the financial documents during its operation. Also, prompt payments are a major issue when it comes to raising your credit status. Fail to pay on the date agreed; you get a negative score on your credit score if that happens.

You might also need to keep monitor credit card reports when they are delivered to you. Try to check for transactions that you did, or did not, make. If you spot an error, report it immediately to the corresponding agency. This will result to a higher credit rating.

Get a loan

Before you can actually improve your credit scores, you need to have a credit to work with. Many small businesses are now opting for business credit cards to improve their ratings. One reason for this is that these plastics have reduced interest rates and APR, which is quite useful for making prompt and affordable payments.

Also, since business credit cards have no principal amounts attached to them, you can easily control the interest expense you make every month. You can do some budget planning to minimize expenses and maximizing profit, without worrying about interests piling up.

Another way to improve your credit status is through credit lines. Many financial institutions, like banks, are now offering short-term lines of credits (LOC) for small businesses, with easy payment terms.

Since interest expense on LOC is dependent on the principal amount, you can easily reduce it by paying the original debt until you reach zero. With this term in mind, you can easily make prompt payments according to the agreement between you and the lender.

The gist to establish your business credit is to make prompt payments on your debts. Whether you have multiple loans or tons of credit cards at your disposal, you need to make sure that you pay each one on its designated date. If done right, you are well on your way to improve your credit scores, which in turn, will improve the financial future of your business.