As an entrepreneur and business owner, you carry the weight of supporting your business financially. One of the biggest challenges of running a successful business is securing loans and financing. It doesn’t matter whether you’re just starting or have been around for a while. Business credit and good credit habits are key to growing your business. Establishing your business credit helps you secure loans and financing, while also protecting your personal finances by separating your business finance from your personal finances. But where, and how, do you start to establish your business credit? We will cover the steps involved and the importance of good credit for your business.
What is Business Credit, and how does it differ from Personal Credit?
Business credit is a measure of your company’s credit strength and your company’s ability to repay debts. It involves the economic activity and credit behavior of the business itself. Business credit is entirely separate from personal credit, which assesses your creditworthiness as an individual. Establishing business credit depends on several factors, such as how long your company has been operating, its financial history, and your personal credit report.
Steps to Establish Business Credit
a) Business Registration and EIN – Registering your business legally and obtaining an Employer Identification Number (EIN) or tax ID number is essential. Your business registration provides proof that your company legally exists, while an EIN provides a unique identification number that helps to separate your business credit from your personal credit.
b) Open a Business Bank Account – Opening a business bank account in your company’s name is a way to establish that the business is indeed legit. It also helps separate your finances from your personal finances. It is a good idea to open your business account at a bank or credit union that offers business loans or lines of credit, so you can build a relationship with the lender.
c) Website and Email Address – Having a professional website that shows your business and a professional email address establishes the professionalism of your business and is also a way to help your business credit.
d) Phone Number – Having a business phone number shows that your business is legitimate and helps separate your personal and business finances.
Requirements for Business Loans
a) Credit Score – No matter what type of loan you’re seeking, lenders will always check your credit score. Most lenders require a credit score of 600 or above to qualify for business loans. However, some non-traditional lenders offer loans to businesses with lower credit scores.
b) Collateral – Some lenders require collateral to secure the loan. Collateral could be anything from equipment to inventory, or even your property.
c) Business Plan – A well-written business plan explains your business goals, financial projections, and other essential information. It is a crucial element in securing business loans.
Sources of Business Loans
a) SBA Loans – These are government-guaranteed loans that are issued through participating lenders. SBA loans are offered to businesses that meet certain eligibility requirements and have been turned down for traditional bank loans.
b) Traditional Banks – Traditional banks offer small business loans, equipment loans, commercial loans, and lines of credit. However, traditional banks are known to have stringent eligibility requirements, and it takes time to get approved.
c) Alternative Lenders – Alternative lenders offer faster funding and require less stringent eligibility requirements. They are known for offering unsecured loans, merchant cash advances, and invoice factoring.
d) Business Credit Providers – Business credit providers report payment histories to credit bureaus, help build business credit, and provide access to business loans.
Establishing your business credit is essential to the success and growth of your business. Following the above suggested steps to building a good business credit profile can improve your chances of getting approved for business loans. By having good credit and an established business credit profile, your business will be more attractive to lenders, which will improve your chances of getting better loan terms and rates. Remember to manage your business finances and budgets carefully to maintain good business credit.