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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How to Build Credit as a Small Business Owner

How to Build Credit as a Small Business Owner

Everyone has a personal credit history. Personal credit history must be separated from their business credit for small business owners. As individuals, the errors in personal credit need not negatively affect the new business. That's why building a business credit makes business sense. 

Apart from distinguishing between the business and the person running it, business credit also gives the business life of its own with several attendant benefits that come with it, including making access to better financing and premiums easier. It also provides the business with the leverage to negotiate better when striking deals.

As a small business owner, nothing says your business is ready to grow like having a well-built business credit.


Credit Scores

When we talk about building business credit, it has to do with how well you or your business is placed on the business credit score. The Business Credit Score is a three-digit number representing how well, or poorly the business or individual is perceived. In other words, it is how creditors view the risk associated with offering you loans. A good credit score means you're well perceived and would make it easier to secure credits like mortgages and other loans. Good credit also influences the terms and rates of loans. 

A bad credit score is not suitable for an individual and even worse for a business.

When a business has its credit, it can be built to attract the best financing separate from the business owner's credit. Credit reports are generated with information from creditors, financial agencies, and credit card issuers, and credit scores are computed. These reports contain most of your economic activities, and models are used to arrive at a score looking at the performance of the individual or business. The most important factors considered include how well finances are managed and how quickly loans are offset.

The credit score often ranges between 300 and 850, with scores below 500 rated at the poorest while scores above 800 are rated as excellent. Generally, having a score above 670 is considered a good score.

Good credit scores unlock several doors, including best interest rates and competitive lending terms. Poor credit scores are terrible for businesses as it makes securing financing difficult and in very costly conditions. 


Building Good Credit Scores for small businesses

Naturally, new businesses have the opportunity to build excellent credit scores to make it easier to secure loans. Credit bureaus use companies' registration and incorporation details to generate credit scores. 

The golden rule of building excellent credit scores is to pay creditors on time and not default. Most credit bureaus give very high ratings for paying on time. As a small business, ensure you avoid activities that may make paying off loans difficult.

Note that business credit isn't built overnight. It takes some time to build them. As a business, you can check your credit from credit bureaus. New businesses may not immediately have credit scores at all. But if you ensure the business is incorporated and registered, it would have. Once you have a credit score, make it a habit to check it frequently. You're likely to discover some errors that can be rectified on time before affecting your business.

Also, note that you can improve your score by working with creditors that report payment performance to credit bureaus. However, having a business credit card is an easier way to let bureaus monitor your financial performance. 


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Jim McClaflin, EA, NTPI Fellow, CTRC
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