Most businesses rely on having access to credit, especially when times are tough. In 2020, many businesses received government help through the Paycheck Protection Program (PPP), but declining revenues made it difficult for them to recover and survive without other lines of credit.
As businesses have waited for an economic recovery, their debt has mounted, and many small business owners have needed to plow their personal savings into their LLCs.
According to a survey by the Federal Reserve, 80% of small businesses experienced a drop in revenue between 2019 and 2020. This had an impact on the personal finances of 80% of owners, who either had to reduce their salary or pay business expenses from their personal savings.
The number of firms with outstanding debt grew by 8%, and the debt held by firms rose. Many firms turned to large banks for money, but firms with lower credit scores turned to online lenders and other finance companies.
Building Business Credit
Getting a better credit score requires several steps as outlined by TRUiC (The Really Useful Information Company). These include establishing funds, getting listed with credit agencies, and keeping their existing lines of credit in good standing.
Building a foundation
Using the right business structure is the most important step toward building business credit. It is very difficult for a sole proprietor to build business credit if paying for business expenses from a personal account. This indicates instability to creditors and is one of the reasons most small business owners opt to form an LLC or corporation.
During the business formation, a business must set up an Employer Identification Number (EIN). This is the unique number issued to every business for tax filings, for setting up a business banking account and getting loans.
Establishing Business Credit History
A new business can’t have good credit because this takes time to build. However, there are certain things every new business can do to establish a good credit history. Paying bills on time and prioritizing them according to importance are both vital. Taxes, payrolls, rent, utilities, suppliers, credit cards, and even other small debts must be settled every month, or by paying at least the minimum amount due.
There are several ways to manage the cash flow of a business, and some businesses like using a working capital loan. They pay this off with their business bank account and build their credit profile.
Some vendors also offer Net-30 accounts, allowing businesses to pay for goods 30 days later after the invoice date. Invoices paid earlier also receive a discount. Net-30 companies report to business credit bureaus, helping a business build a credit history. The more net-30 accounts a business has, the more it can maximize its credit building.
Another way for a business to increase its number of credit lines is to apply for a business loan and a business credit card.
Some things can hurt a business’s credit score and put it at risk. The most obvious is private lenders who prey on businesses looking to improve their credit score. These charge a very high daily interest, making them unaffordable and difficult to repay.
Business owners that use their personal accounts or credit cards to repay business debt make creditors wary of extending any more credit to them. Business payments must always be made through a business account.
Business owners must always make sure the net-30 vendor reports all tradelines to a credit bureau, otherwise, they may find themselves without much-needed business credit.
Finally, outdated information can negatively impact the credit line of a business. The best way to avoid this is to ensure all business documents, at every level, are filed correctly.
Monitoring Business Credit
There are several credit reporting agencies for businesses and it is easy to set up an account with them. Business owners should check their business credit regularly by pulling reports and checking their business FICO score.
Any errors or inconsistencies found in a credit report should immediately be disputed with the credit reporting agency. Business information must also be updated whenever something changes. Business credit monitoring services can help busy business owners monitor their business credit.
Using personal accounts is a sure sign of business instability. Establishing a robust credit score by building business credit can take time, but is easy to achieve. Every business owner can use their vendors and lenders cleverly to start building business credit. AI is making the credit assessment process easier and faster. It eliminates errors and any human bias as businesses work toward creditworthiness.