How to build a business credit score?

How to build a business credit score: 5 concrete steps for success

1. Prepare your business plan

A solid business plan outlines everything from market analysis and revenue projections to operations and marketing, helping creditors understand key aspects of your business. When you add key financial documents like balance sheets, profit and loss statements, tax returns, and cash flow statements, you allow them to evaluate their repayment risk and help them get a complete picture of your business. These documents are mandatory for many small business loans and lines of credit.

2. Separate your personal credit from your business credit

Sole proprietorships and general partnerships are common business structures but mingling personal and business finances means personal credit problems may affect how lenders view your business.

A Limited Liability Corporation (LLC) or other corporate structure allows you to separate your business dealings from your personal finances and can help establish credit as a business entity.

Here are four steps to separate your personal and business credit:

• Apply for a business checking account: Use this to deposit income and pay for your business expenses, such as payroll, utilities, rent, or mortgage.
• Apply for a business savings account: Use this account to set aside funds for your emergency fund, taxes, and future investments.
• Apply for a business credit card: Use a card for software subscriptions, utilities, travel expenses, etc.
• Maintain accurate financial records that highlight your business as an entity which confirms (accounts, balance sheet, income statements, tax returns, rent receipts, etc.)

3. Register to improve your business credit rating

When it comes to business credit reporting, ratings can really depend on your industry and how long you’ve been in the game.

Even if you have long standing credit accounts with your suppliers, you might still be flying under the radar of credit reporting agencies.

To establish a business credit score, think about registering with credit rating agencies like Dun & Bradstreet to get a DUNS number. This number allows lenders to request a credit report and see that you’re keeping up with your payments. It’s a good idea to encourage your sellers and creditors to report payment histories to at least one of the business credit reporting agencies. The more records of a solid payment history, the better for your business credit score.

4. Manage your business debt

When you open a credit account for your business, follow these basic guidelines to establish and improve your credit rating:

• Consistently paying on time is crucial in maintaining a strong credit score for business. Setting up automatic payments is one way to ensure timely payments.
• Taking control of your debt ratio - the amount you owe versus your available credit, can help demonstrate your creditworthiness to potential creditors.
• Once you've established a solid payment history, you can choose to increase your credit limit – even if you don’t need funds immediately. This demonstrates your ability to have credit without abusing it.
• Use your credit accounts periodically to keep your credit active and maintain a credit score. Zero activity on your credit accounts might lower your credit score.

5. Regularly monitor your credit reports

Regularly checking your business credit report helps you catch mistakes early and make necessary adjustments to improve your business credit rating. This consistent monitoring also plays a crucial role in establishing your business credit score by ensuring that your positive financial behavior, such as making timely payments, are reflected accurately.

Understanding how to build a business credit score is essential for your long-term success. By proactively establishing a strong credit score for your business, you’ll be well-positioned to secure a loan when you need it the most.