Business credit is something that has often confused small business owners. The reality is that it's not as straightforward to build business credit as it is to build personal credit. In this latest blog, I'll go over some ideas and strategies for establishing and building business credit for your small business.
How Business Credit Works
Remember that your corporation is a separate legal entity. It can be sued, it can go bankrupt and it pays its own taxes. For this reason, banks and other lenders need to assess and trust your corporation on its own merits. Just like personal credit, banks and other lenders will rely on past history and performance as a primary predictor of future performance. In other words, if a corporation had a loan in the past and it successfully paid it off on time, that same corporation is more likely to repeat that good behaviour in the future.
In terms of a business credit score, there's no one primary source that determines that for all businesses, instead, a business credit profile is generally made up of information pulled together from numerous credit bureaus such as Equifax. When a lender or a supplier is trying to assess your business creditworthiness, they may pull your report from one or many of these different credit bureaus. From these reports, they will blend together the information to determine your overall business creditworthiness or business credit profile.
As a final thought here, be prepared to be patient. Building a decent amount of business credit can take time. Expect it to take at least 3 to 5 years before your small business establishes credit which can be a significant factor towards getting a larger loan or line of credit for growing your small business.
Strategies and Tips to Establish and Build Business Credit:
1. Properly Establish your Business
When a lender or supplier is trying to determine your creditworthiness, it definitely helps if they can find information about your business and that it looks legit and established. Make sure that you have the following things set up at minimum:
A Google business profile.
A few social media business profiles. You don't need them all but a few like Facebook or Linkedin are good.
Your business listed in a few local business directories. Things like Yellow Pages, Yelp, etc. are good, but local ones on your city's website, the local chamber of commerce, or the Better Business Bureau will help as well.
A decent website that looks complete with relevant information.
2. Business Credit Cards
Business credit cards are a great way to start your business credit journey. However, unless you have a mature business with consistent profits/cash flow, you may have trouble qualifying unless you secure the credit card limit with a locked-in investment like a GIC. In other cases, banks may request that you sign a personal guarantee so that if your corporation can't pay off the balance, you will be on the hook for it. While it might not feel great signing a personal guarantee or locking in a GIC as security, if you think business credit will play a significant role in growing your business in the future, it's probably worth it.
3. Find Suppliers/Vendors that are Willing to Offer Terms - They Must Be Reporting!
Your business might be given something like 30 days to pay for services or goods. In fact, your business could routinely be given terms and it's quite common; however, most businesses out there don't report payment behaviour to credit bureaus as a bank does. As a result, credit bureaus have no idea and you paying all your suppliers or vendors on time has no bearing on our business credit. Since you paying your suppliers and vendors on time is definitely showing creditworthiness, try these tips:
Ask all your suppliers or vendors if they report payment history to credit bureaus. If they do, ask them nicely to report your good payment history if they haven't already.
If none of your suppliers or vendors report payment history to credit bureaus, the next time you need something, try buying from larger organizations and companies. Bigger entities are more likely to report and don't be afraid to ask them if they do before agreeing to buy anything.
4. Take out a Small Loan or Line of Credit, even if you don't need it.
A tool often used to build business credit is to take out a small business loan or line of credit, even if your business doesn't really need it. It also helps if the loan or line of credit amount is small enough that your current business can afford it and you can qualify based on existing cash flow and profits. You might want to approach smaller financial institutions such as credit unions, small regional lenders, or even secondary market lenders if you think a bigger bank (or your current financial institution) won't readily lend to your business. The key is though that before you agree to anything, make sure whatever financial institution you choose and will lend you money is actually going to report your payment history. Just because it's a loan or line of credit with repayment obligations, don't automatically assume a credit bureau will be told about your good efforts to repay the loan.
5. Finance a Vehicle
Vehicle companies are notorious for offering pretty liberal credit to just about everyone, your small business included. Vehicle companies likely won't touch you if you are brand, brand new, however, if you have some traction and have been around for a bit, they likely will extend your business credit to purchase a new vehicle. The vehicle company may want a personal guarantee but the vehicle is also used as security so sometimes you can negotiate out of it. At the end of the day though, just like the strategies above, make sure that whatever vehicle company you choose actually reports your good repayment history to a credit bureau.
6. Finance a Piece of Equipment
Just like vehicle companies, the makers of equipment are also decently liberal around credit, this is especially true around the end of the quarters or year-end because sales goals need to be met. Again, the equipment manufacturer may want a personal guarantee but the equipment is also used as security so sometimes you can negotiate out of it. Again, just like the strategies above, make sure that whatever equipment company you choose actually reports your good repayment history to a credit bureau.
7. Refinance Assets you Already Own
If you don't need a new vehicle or equipment, consider what you already own and try to refinance it. There are many companies that do this and it's a quick way to get a loan so you can show off your good repayment behaviour. Again, before you sign anything, make sure whatever refinancing company you pick will actually report your good repayment history to a credit bureau.
8. Ensure Utility, Phone, Internet and Recurring Charges are in the Name of the Business
Most small businesses have utility, phone, internet, or other recurring expenses, however, you'd be surprised how many are registered under a personal or nonbusiness name. These big companies often report payment history to credit bureaus so make sure you take advantage. That being said, make sure you are actually paying for these things on time! These little expenses might not seem like a big deal if you pay them late; however, you'd be surprised by the harm that poor payment behaviour can have. To be safe, try to get these set up to pay automatically on a credit card or through direct debit from a business bank account.
Establishing and building business credit can take time and requires a strategy. It can happen naturally, however, there are tips and strategies that can help you and your small business establish and build it more quickly and reliably.