Updated on June 7, 2021
Many people dream of owning a small business but aren’t quite sure how to establish business credit as they get up and running. While each case may be different, here are seven items to consider when starting to build business credit.
1. Have a Solid Business Plan Ready
Before anyone will consider lending to your small business, you’ll likely need a solid business plan. A well-written plan is a key factor in showing potential lenders that you’re committed to the business and have spent time researching and planning.
If you need help writing a business plan, reach out to local resources like Small Business Development Centers and SCORE, a network of free small business mentors, in your region.
2. Make Sure Your Personal Credit is Clean
While your ultimate goal is building credit in your business’s name, lenders may not lend to a small business if the owner can’t demonstrate that they’re able to keep their own finances in order. In fact, some lenders may see a newer small business owner’s personal credit score as being just as important as their business’s.
You may be required to personally guarantee business credit by co-borrowing or co-signing. This means that if your business doesn’t have the money to pay back a lender, you’d be required to do so out of your own personal finances. It also means that if your own finances aren’t in order, your small business may not get approved to borrow, either.
3. Set Up a Business Account
Opening a business account will allow you to keep your business and personal finances separate. You’ll want to review options at different financial institutions to see which offers the best perks with the lowest fees. Credit unions like PSECU are a great place to start. We offer business products and services like checking, savings, certificates, and payment processing.
Having a business account can also help you with getting approved for business credit. Some banks or credit unions will serve as references stating your business finances are in order, even if you have only a checking or savings account open with them.
4. Get a Business Credit Card and Utility Accounts
Some financial institutions have credit cards available to small businesses. Just as with personal credit cards, you’ll want to control your spending. Use the card for small, frequent purchases that you can pay in full. This shows a positive pattern of spending and paying without acquiring extra debt from interest accruing on your account.
Having smaller utility accounts such as water or phone in your business’s name can help you, as well. If you make your payments on time, these companies may be able to serve as credit references when you’re applying for a loan.
5. Establish Lines of Credit with Vendors
A line of credit established directly with a vendor allows you to spend up to a certain amount of money without paying up front. For example, if you have a $5,000 line of credit, you’ll be able to buy up to $5,000 worth of products from that vendor.
As with personal credit, make sure you pay close attention to the fine print and any invoices you receive, and always pay vendors on time. On invoices, you may see terms like “Net 30” and “Net 60.” This indicates the number of days you have to pay the outstanding balance. Some vendors will offer a discount if you pay early. For instance, “2% 10 Net 30” means that the balance is due within 30 days, but if you pay it within 10 days, you’ll get a 2% discount, which can add up to big savings.
6. Familiarize Yourself with Dun and Bradstreet
Just as you have personal credit reports, businesses can have credit reports, too. One common resource that lenders use is Dun & Bradstreet. You’ll want to consider getting your small business a D&B D-U-N-S® Number. This will allow potential lenders to see information about your business’s finances, including payment history, financial statements, sales records, etc.
7. Start Slow and Create Back-Up Plans
Make sure you don’t get in over your head. Only borrow small amounts at first and increase your borrowing only as your needs (and ability to make larger payments) increase. Even the best entrepreneurs face challenges, so set up contingency plans to get through tough times. Don’t forget to use the free and low-cost resources we noted earlier, and remember that asking for help from those who have been in your position previously is a great way to start.
Learn more about our business banking services today. And find more money management tips and resources on our WalletWorks page.
D-U-N-S® is a registered trademark of Dun & Bradstreet International, Ltd.