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Establishing Business Credit to Benefit Small Business Administration

Many small business owners are not aware of the importance of establishing business credit. By definition, business credit is a record of a company’s financial history. This history is maintained by credit reporting agencies and used by lenders, suppliers, and others to determine the creditworthiness of a business. 

Establishing business credit with the help of service providers like The Business Cowboy is important for several reasons. First, it can help you get loans and lines of credit. Second, it can help you get better terms from suppliers. And third, it can help you build your company’s reputation. 

If you’re a small business owner, there are a few things you should know about establishing business credit. Here’s what you need to know.

What Are Business Credits, and What Do They Entail? 

Business credits are essentially a record of a company’s financial history. The information contained in a business credit report includes payment history, public records, tradelines, and more. 

Generally speaking, businesses will have two types of credit: personal and business. Personal credit is established when an individual applies for a loan or line of credit in their own name. Business credit is established when a company applies for a loan or line of credit in the name of the business. 

How to Establish Business Credit 

There are a few things you need to do in order to establish business credit.

  • The IRS must first issue you an EIN, also known as an Employer Identification Number. You’ll use this number to open bank accounts, apply for loans, and more. 
  • Next, you’ll need to start building positive trade lines. Trade lines are essentially lines of credits that businesses can use to buy goods and services from suppliers on the account. These accounts are reported to major business credit reporting agencies. Each time you make a payment on time, it will be reported as a positive activity and will help build your company’s credit score. 
  • Finally, you’ll need to make sure that all your positive activity is being reported by the major business credit reporting agencies. The best way to do this is to sign up for monitoring services. These services will keep track of your company’s activity and report it to the agencies on your behalf. 

Factors that influence your business credit score

1. Payment History

One of the most important factors that influence your business credit score is your payment history. This refers to whether you have made your payments on time and in full. Payment history is typically reported by your creditors, such as banks or suppliers, to the credit bureaus. Therefore, it is important to make sure that you are timely with your payments in order to maintain a good business credit score.

2. Credit Utilization

Credit utilization is another important factor that influences your business credit score. This refers to the amount of credit that you are using in relation to the amount of credit that is available to you. It is generally recommended to keep your credit utilization below 30%, as this will help to improve your business credit score.

3. Credit Mix

The mix of credit accounts that you have can also influence your business credit score. This refers to the types of credit accounts that you have, such as revolving accounts (e.g., credit cards) or installment accounts (e.g., loans). Having a mix of different types of credit accounts can help to improve your business credit score.

4. Length of Credit History

Another factor that can influence your business credit score is the length of your credit history. This refers to the amount of time that you have had open lines of credit. The longer your credit history, the better it is for your business credit score. Therefore, it is important to avoid closing any unused lines of credit, as this can shorten your credit history and negatively impact your business credit score.

Mistakes to avoid when trying to build business credit

1. Not Establishing Business Credit Early On

One of the biggest mistakes you can make when trying to build business credit is not establishing it early on. This is important because the longer you have been in business, the more likely creditors are to view you as a low-risk borrower. Additionally, establishing business credit early on will help you to build a strong credit history, which can be helpful in obtaining financing in the future.

2. Not Separating Personal and Business Finances

Another mistake that can be made when trying to build business credit is not separating personal and business finances. This is important because if you commingle your finances, it will be difficult to track your business expenses and income, which makes it harder to build a strong credit history. Additionally, creditors may be less likely to extend financing to you if they believe that your personal finances are at risk.

3. Not Paying Bills on Time

One of the most important things you can do when trying to build business credit is to pay your bills on time. This is because payment history is one of the most important factors that creditors consider when determining whether or not to extend financing. If you have a history of late payments, it will be difficult to obtain financing in the future.

4. Applying for Too Much Credit

Another mistake that can be made when trying to build business credit is applying for too much credit too soon. This is because each time you apply for credit, an inquiry will appear on your credit report, which can hurt your score. Additionally, if you are approved for too much credit, it may appear that you are overextended and unable to manage your finances properly.

5. Not Monitoring Your Credit Report

It’s also important to monitor your business credit report regularly so that you can catch any errors or negative information that may appear. If you see something on your report that doesn’t look right, dispute it with the appropriate agency so that it can be removed. Additionally, monitoring your report will help you to keep track of your progress and ensure that you are taking the necessary steps to improve your score.

Endnote:

So, small business owners, these are five key credit-building tips you should remember as you work to improve your business credit score.

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