Want to make your business easier to manage? Building a business loan or improving your credit profile is a great way to do this.
Credit history and credit scores can play a big role in expanding your business if you want to be approved for financing.
However, a personal loan can only get you so far. At some point, you will need to work on building credit for your business. Building a healthy credit history isn’t as hard as you might think, and these tips will get you started.
What is a business loan?
A business loan is simply a way to measure how responsible your business is when it comes to managing its finances.
It’s like a personal loan. The difference is that a business loan only considers financial activities related to running your business.
This includes factors such as:
- How many credit lines does your business have
- The balance of debt for each
- How consistent are you in paying debts and other bills on time
- Whether your business has any public records, such as liens, bankruptcies, or court decisions.
“Building good business credit is all about building a history of good financial habits over time, including how much you borrow, how quickly you pay it back, and how you meet other financial obligations,” says Ben Gold, CEO of Good Funding.
Why a business loan matters
You can apply for a business credit card or small business loan based on your personal loan if you’re just starting out, but it’s a good idea to separate your personal loan from your business loan in the long run.
Once you have established your business loan, you can apply for a business loan without any personal liability; the business becomes responsible for repaying the loan.
A business loan is important because it can affect your ability to qualify for business financing—and the terms you get.
“Business credit is a way for a supplier, lender, investor, etc. to evaluate your risk of repaying any loan capital or loan granted,” says Brian Cairns, CEO of business consulting firm ProStrategix Consulting.
Poor business credit history or no business credit history at all can prevent you from opening vendor lines or getting approved for business loans or lines of credit. If you are approved, a lower credit score can lead to higher interest rates and higher borrowing costs.
Your business credit score is based on your experience with your business finances, such as your current business account, any credit accounts you open with merchants such as office supply stores or hardware stores, and any business credit cards you open, as well as any loans you take.
How long does it take to build a business loan?
Most business owners don’t like to hear this, but when it comes to building business credit, the slow and persistent win the race.
Nat Wasserstein, a restructuring consultant and managing director of Lindenwood Associates in the Greater New York area, believes it takes three years or more to build credit for a business.
“Usually loan applications say they want you to exist for at least three years,” says Wasserstein.
In some cases, lenders may require as little as one year, he says, but that’s not the norm.
“They want to see you were around,” Wasserstein says. “If you have it, they want to see that there is nothing outstanding. There are no courts. They should have enough time to decide if they want to lend to this company.”
7 steps to build business credit
1. Apply for a Federal Taxpayer Identification Card
Credit bureaus use this to keep track of your business. You can apply online at the IRS website.
2. Open a commercial bank account
One of the easiest ways to get started building business credit is to open a bank account in your business name and use that account for all your business deposits and withdrawals. Please note that you will need to bring your federal tax ID with you to open it.
Be careful when handling this account to avoid bounced checks and overdrafts. It will be easier to keep books and pay taxes if you keep good records.
In addition, you must maintain an adequate balance so that you do not have overdrafts or waivers. This will show creditors that you are responsible for your finances.
3. Form a business structure
Forming an LLC or other commercial entity such as an S Corp. can make it easier to separate your business finances from your personal finances.
It is important to get advice from an accountant and a lawyer on the right business entity for you. The decision you make can have tax implications, and the wrong choice can cost you money.
4. Apply for a business credit card
Using a business credit card to pay for all your business expenses will help you establish a business loan. Ideally, pay your balance in full every month, but if you can’t do that, make sure you don’t run out of it. High credit usage can lower your business’s credit score.
If you have a low credit limit and need to regularly pay expenses such as flights and hotel accommodation for business trips to the card, consider applying for a second card so you don’t have to use either of them to the maximum.
Also, take the time to research your business card options before deciding which one to apply for.
A business credit card, for example, can provide balance flexibility, but that means paying interest. The business card may offer rewards and interest-free borrowing, but it also entails an obligation to pay in full every month.
Here are some recommendations if you are looking for business credit cards to build credit:
Keep in mind that credit card companies usually check your personal credit history and financial records when you apply for a business credit card. The better your personal credit, the better your chances of being approved and receiving a favorable interest rate.
5. Set up trade credit
Opening vendor lines can help build credit history if your vendors are willing to offer financing terms. And it may be more affordable for some business owners than a credit card.
“The good news is that many of these sellers don’t check personal credit, which means they may be available to business owners with less than ideal personal credit,” says Jerry Detweiler, former director of education at Nav.
If you work regularly with a large cash register or hardware store, ask if they offer a line of credit or store credit card. Use it for your purchases in this store and pay your bill on time.
6. Make Sure the Major Credit Bureaus Track You
Sometimes large credit bureaus take some time to track down a small business. Use the tools on their sites to find out if you are being tracked and, if so, get a credit report.
Three credit bureaus can monitor your business: Dun & Bradstreet, Experian and Equifax. To be tracked by Dun & Bradstreet, you must apply for a DUNS number.
Banks and lenders use this number to check your company’s creditworthiness, and the D&B service is the most widely used. The D&B credit score is called the Paydex score and ranges from 1 to 100.
Ryan Botsman, partner and chief operating officer at consulting firm DeLap, says scores of 80 and above are considered good credit — roughly equivalent to 750 personal FICO scores.
7. Stay on top of all your bills
According to Nate Wasserstein, restructuring consultant and managing director of Lindenwood Associates in Upper Nyack, New York, many high-profile suppliers report to Dun & Bradstreet and other credit bureaus.
It’s even possible that a provider like your phone company will report your payment plans to the credit bureaus, so stay tuned, he advises. Put bill payment reminders on your calendar so you don’t have any marks on the radar screen for the next few years.
When to Apply for a Business Credit Card
After repeated good financial behavior, you will improve your chances of successfully applying for a business credit card. A good time to try this is at the one year mark. At this point, the credit issuers will have enough activity to evaluate you.
You can also check your business credit report to make sure your credit is in a good place before you apply. Sometimes creditors take some time to report to the credit bureaus. Credit card issuers will likely check your personal credit as well, so make sure you want it there before you apply.
If you’ve fallen behind and paid some bills late – a common occurrence in new companies with unstable cash flow – wait until you have 12 months of a perfect or near-perfect track record to apply.
Even if you can only get a credit card with a small credit limit, like $1,000, be patient first. Rome was not built in a day, and neither was a business loan.
As you pay this bill on time each month, you will build a stronger and stronger credit profile. Just make sure you don’t use all available credit.
bottom line
Building business credit is more like a marathon than a sprint. Start early if you think you will need to apply for a substantial loan or business loan. And make sure you take care of your personal loan at the same time.
Typically, you will need to provide a personal guarantee for a business loan, so the better your personal credit score, the easier it will be to get the business loan you need.
If you have a strong business loan, you will have access to better interest rates. This can lower the overall cost of running your business and help you achieve greater profits.
*All information about Capital One Spark Classic for Business and the Discover it Business card has been independently collected by CreditCards.com and has not been verified by the issuer.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
