A small business line of credit can improve cash flow while supporting the growth of your business. Even with a successful and profitable business, cash flow can be challenging. Commonly, businesses use a small line of credit to keep cash flow healthy and ensure they always have plenty of funds available. For small businesses, loans or lines of credit may be harder to secure. Small business loans may involve more risk for lenders, therefore, they may charge higher interest rates and fees. Finding affordable ways to borrow money for a small business can help keep profits healthy. Keep reading to learn more about how to establish credit for a small business and secure financing.
What Is Business Credit?
Business credit is similar to personal credit in which it is an evaluation of an entity’s ability to maintain a healthy financial situation by taking on debt and paying its bills on time and in full. Like personal credit, a business needs to build its credit profile over time by making monthly payments on time and by paying off old debts before acquiring new ones. There are many consequences, both positive and negative, depending on the credit score of your business. For example, a business that has a proven track record of financial stability and on-time payments, may see lower insurance premiums and lower interest rates on business loans and equity lines of credit. Some other positive consequences of having a good business credit score is you may be able to qualify for larger loan amounts with longer repayment periods. Additionally, if you have vendors that you do business with regularly, and they are aware of your good business credit score and you always pay them on time, they may extend to your business longer repayment terms which can help you maintain liquidity and a higher cash flow. Having a poor business credit score could lead to many unfavorable outcomes including paying higher interest rates, higher fees, and possibly being denied for the loan amount that you need. Also, vendors may feel the need to extend to your business some of the most strict terms they can offer or even require you to pre-pay for any orders that you place with them.
Before you can start to develop a credit score for your business you need to make sure your business is legally registered as a business. There are several different types of business registrations you can choose from depending on what kind of business you are operating. Make sure you register for the business structure that makes the most sense for your situation and to seek professional assistance if you are unsure. Once your business is registered, loan payments and other credit account information can begin to be reported to the business credit reporting agencies. The type of information that often gets reported to these credit reporting agencies includes payments to vendors and suppliers as well as creditors. It is this type of information that formulates your business’s credit score. This credit score may affect your eligibility for SBA loans, term loans, and other types of business financing including net nerms and credit limits imposed by vendors and suppliers. The business credit score can also affect your insurance premiums, your ability to raise money from outside investors, and whether or not you qualify for contracts with other organizations.
Business credit scores can range anywhere from 0 to 100. Many lenders may have minimum business credit score requirements that begin at 75.
One last important thing to note is that even though some lenders, suppliers, and/or vendors may take into consideration the personal credit score of a business owner when they are applying for a business loan, a business credit score and a personal credit score are two entirely different things. As a business owner, it may be a wise decision to separate your personal and business finances as much as possible.
Why Is Establishing Credit for a Small Business Important?
First off, a business credit score is important to show lenders, suppliers, and/or vendors how financially risky your business may or may not be. If you are a small business owner just starting out, you may not have a business credit score yet and you may need to rely on your personal credit score to obtain financing. As soon as you are able to begin working on your business credit score and separate your personal finances from your business, you should. Here are some of the main reasons why establishing credit for a small business is important.
- Protect your personal credit score: Running a business is not cheap and you may need larger sums of money to hire new staff, purchase inventory, purchase real estate, or to cover one of the many other expenses a business encounters. By using your personal credit to obtain these larger sums of money, your personal debt utilization ratio can become extremely high. By having high credit usage, you can lower your personal credit score and you may find it difficult to secure financing for other things in your personal life, like a car loan or mortgage.
- Obtain better terms with vendors: Vendors may also look at your business credit score to determine what kind of terms they can offer you. Common terms may include net 30, 60, or 90 days, or depending on your credit score, a vendor may ask you to prepay all your orders. The better your business credit score the more likely a vendor will trust you with larger amounts of inventory without needing to be paid back immediately. This allows your business to keep more cash on hand and to make vendor payments after you are already starting to generate revenue from sales from the purchased inventory.
- Business financing is much more simple: When you have a higher business credit score, the process to obtain traditional types of financing from lenders or the SBA is much more simple and processing takes less time. You may also qualify for some of the better interest rates available depending on the business loan type that you pursue. Higher credit scores also are helpful to maximize your available credit limits when applying for business lines of credit.
For any small business owner, having a good business credit score will go a long way to help your business expand and scale up at an appropriate pace. But what if you have zero or limited business credit? What can you do to improve your business credit score?
Tips to Build Business Credit
There are several things you may want to consider when you are first trying to build business credit or when you are trying to improve upon a less than desirable business credit score. Here are some of the most basic steps that you can take immediately.
- Obtain an EIN: One of the first steps to building business credit is to obtain an Employer Identification Number and to change your business entity to a corporation. This will help you to file taxes on behalf of the business as well as open a bank account under your business name. You can then also secure business contracts.
- Obtain a business credit card: Opening a business credit card is a quick and easy way to begin to build business credit. All payments made on the credit card will be reported to the major commercial credit agencies.
- Pay everything on time: Paying your business credit cards and vendors on time will help to build that credit score little by little. Any missed payments will not only hurt your credit score, but you could begin to build a bad reputation within your industry by missing payments to vendors. Vendors not only report payment information to the commercial credit reporting agencies, but they could also potentially talk among themselves and other vendors may be reluctant to extend your business any credit if you have outstanding bills with other vendors.
- Incorporation: At the same time that you apply for an EIN through the federal government you may want to incorporate your business. Doing so has numerous benefits including asset protection through limited liability, the ability to build credit and raise capital, hefty tax savings, and more.
- Break out personal vs. business expenses: As a business owner, separating your personal and business finances as much as possible is critical.
These are just a few of the main ways you can begin to build your business credit score or to improve upon an existing one. It is important to not take on more debt than you can afford and to maintain good standing with all of your creditors.
How Kickfurther Can Help
Establishing a small business and business credit can take time. As every business owner knows, time is money. Small businesses may struggle to qualify for financing. This is where Kickfurther can help. Kickfurther specializes in helping small businesses secure the funding they need to invest in inventory. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds that they are unable to acquire through traditional sources. We connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules, allowing your brand to scale quickly without impeding your ability to maintain inventory or financial flexibility.