Access to capital, a critical lifeline for any fledgling entrepreneur, can be the difference between realizing your dreams and watching them fade. That's where small business credit comes in.
But small business credit isn't just about borrowing money; it's also about building a stable financial foundation that can empower you to seize opportunities, weather financial storms, and fuel sustainable growth. Want to learn how? Discover what small business credit is, why it matters, and how to establish business credit effectively.
What Is Small Business Credit?
Small business credit refers to the ability of a small business to access borrowed funds. Those funds can be used to finance its operations, expansion, or other financial needs. In other words, small business credit is a measure of a company's financial trustworthiness, and more trustworthiness = more funds.
Small businesses require credit because, like individuals, they sometimes require additional capital beyond their immediate cash flow in order to grow, invest, or cover unexpected expenses.
Small business credit can be used to obtain funding in various forms, including:
Business loans: These are a lump sum of money that a company borrows from a bank, credit union, online lender, or other financial institution. The company agrees to repay the business loan amount (plus interest) over a specified period of time.
Business lines of credit: Put simply, a business line of credit provides a small business with access to a predetermined amount of money that they can draw upon as needed. Interest is only paid on the amount borrowed, and once the borrowed amount is repaid, the credit becomes available again.
Business credit cards: Very similar to personal credit cards, except that they're issued to businesses instead of individuals. Business credit cards provide a revolving line of credit that the small business can use to make purchases and cover expenses. Some business credit cards also come with rewards or cashback programs to sweeten the deal.
Equipment loans: This type of funding is specifically used to purchase equipment or machinery the business needs.
Merchant cash advances: In this arrangement, a business receives a lump sum payment in exchange for a portion of its future credit card sales. Repayments are made daily as a percentage of these sales, and the required interest rate can be exceptionally high.
Microloans: These are small short-term loans offered by various organizations, including the U.S. Small Business Administration (SBA). They often have lower requirements than traditional loans, which makes them especially helpful for small businesses with limited credit history.
Benefits of Having Good Business Credit
If you have good business credit, you can enjoy several benefits that can positively impact your small business. Some of the most compelling advantages include:
Access to funding: First and foremost, good business credit makes it easier to secure loans, lines of credit, and other types of funding at favorable terms. Lenders are more likely to extend credit to businesses with a strong credit history, which means you can more easily access the capital you need.
Lower interest rates: A positive credit history often leads to lower interest rates on loans and credit lines. As a result, you'll pay less in interest over the life of the loan, ultimately saving your business money.
Higher credit limits: Lenders are more willing to offer higher credit limits (i.e., more money) to businesses with good credit.
Improved supplier relationships: Good business credit can lead to better relationships with suppliers. Why? Suppliers may be more inclined to offer more flexible terms, deeper discounts, or longer payment periods to businesses with a proven credit track record.
Streamlined renting and leasing: If your business needs to rent office space, storage space, equipment, or vehicles, good credit can make the process easier. Landlords and lessors are more likely to approve your rental applications (and offer better repayment terms) if your business has a positive credit profile.
Emergency preparedness: Unforeseen emergencies or cash flow gaps can arise in any business, no matter how successful. But if you have good business credit, you can quickly secure financing when needed, making it easier to navigate unexpected challenges without disrupting operations.
Growth potential: As your business expands, you'll likely require additional funding to support its growth. Good business credit ensures you can access the necessary funds to do so, which means you'll be able to expand into new markets, launch new products, and hire more employees.
With all those benefits in mind, it quickly becomes clear that good business credit isn't just a nice thing to have — it's a necessity for taking your business to the next level.
How to Establish Business Credit for the First Time
Establishing business credit for the first time requires a deliberate and systematic approach. Here are the steps you should take when building yours.
1. Form and Register Your LLC
It may sound obvious, but it's worth mentioning that if you want to build business credit, you'll need to have a proper business.
So, ensure your business is properly registered with the appropriate government agencies by forming an LLC. In addition, obtain all the required licenses and permits, which our Business License Research Package can help you determine. Forming your business establishes it as a legal entity that's separate from yourself, which is an essential first step in building business credit.
2. Get an EIN
An Employer Identification Number (EIN) functions as a Social Security number for your business. You'll need one to open a business bank account or credit card (more on that in the next step), so apply for one promptly.
You can get an EIN by applying directly through the U.S. Internal Revenue Service (IRS). But, if you're looking for the most convenient method, you'll love our EIN filing service.
3. Open a Business Bank Account and Credit Card
One of the most crucial elements of building business credit is separating your business finances from your personal finances, and one of the best ways to do that is by opening a business bank account.
Depending on the account you choose, you may be able to enjoy perks like low or nonexistent monthly fees, 24/7 customer support, free resources, and more.
We also recommend getting a business credit card, which you can use to pay off purchases over time and earn cashback rewards, plus other bonuses.
4. Consider Getting a D-U-N-S Number
Dun & Bradstreet is a world-renowned organization that provides business data and analytics to companies. It's through Dun & Bradstreet that you can obtain a D-U-N-S number for your business.
Much like an EIN, a D-U-N-S number is a unique identifier for your business. But, in this case, it's used by lenders and suppliers to see how creditworthy your business is. So, if you decide to get a D-U-N-S number, you'll be creating a credit profile that can be used to consolidate and showcase your business's credit history.
5. Pay All Your Bills On Time
Remember that paying your bills in a timely manner is a core component of establishing good credit, so don't forget to do so.
This is especially true for bills paid over time as part of a financing agreement. For instance, if you purchase a piece of equipment and agree to pay for it in six monthly installments, making those payments on time will improve your credit score.
6. Apply for a Small Loan
Once your business has more of a financial history, you can kick your credit-building efforts into overdrive by applying for a small business loan.
With each prompt repayment that you make, you'll be boosting your business's credit in the long run.
7. Maintain Your Credit
Building good business credit isn't a one-and-done endeavor. If you want to keep your stellar credit, you'll have to put in the work to maintain it.
That means monitoring your credit on a regular basis and quickly addressing any errors, managing your money responsibly (such as by sticking to a financial plan), and consistently paying back everything you owe.
FAQs About Building Small Business Credit
Get answers to some of the most common questions about building small business credit.
How Can I Get Credit to Start My Own Business?
To build business credit for the first time, try following the steps above, including registering your business, getting a business bank account, and paying your bills on time.
If you're looking for credit you can use specifically to form your business, look into startup loans that are accessible to businesses with limited credit history.
What Is the Fastest Way to Get Business Credit for an LLC?
You can establish your business credit quickly by:
paying your credit card payments early;
getting (and promptly paying off) a microloan; and
paying off multiple purchases on time.
How Long Does It Take to Establish Business Credit?
If you're not explicitly focused on building business credit, it could take several years to achieve a high score.
But if you go out of your way to build credit at every opportunity, it's possible to have good business credit within a year.
Is It Hard to Get Business Credit?
No, it's not hard to get business credit if you already have a good personal credit score. That's because your personal score will make it easier for you to obtain a business credit card, even if your business has little to no financial history.
But if you don't have a good personal credit score, you can still build up good business credit by separating your business and personal finances before following the steps outlined above.
Establish Good Credit to Secure Your Business's Future
Good business credit not only allows your business to get the funding it requires to thrive, but it also helps you maintain a monetary safety net, which is the key to weathering any storm that comes your way.
To get started, check out our ranking of the best credit cards for 2023.
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Carrie Buchholz-Powers is a Colorado-based writer who’s been creating content since 2013. From digital marketing to ecommerce to land conservation, she has experience in a wide range of fields and loves learning about them all. Carrie is fond of history, animals and beauty in equal measure. In her free time, she enjoys knitting, playing video games and exploring Colorado's prairies and mountains with her husband.