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How Small Business Owners Can Build Business Credit

Many people dream of owning their own small business, but aren’t quite sure how to establish business credit as they get up and running. While each case may be slightly different, here are some options you can consider to start building business credit.

 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 business plan is a key factor in showing potential lenders that you’re committed and have spent time researching and planning.

If you need help writing a business plan, there are some great free resources you can check out. Look for organizations like Small Business Development Centers and SCORE in your region.

 Make sure your personal credit is clean

Your ultimate goal should be to get credit in your business’ name, but the fact is, 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, for a newer small business owner, some lenders may label your personal credit score just as important as any business finances.

While your business is very new, your personal credit may play an even larger role. You may be required to personally guarantee business credit by personally co-borrowing or co-signing. This means that if your business doesn’t have the money to pay back a lender, you would 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.

 Set up a business account

You may be asked to provide credit references when applying for business credit. Some banks or credit unions will serve as references, stating that your finances are in good order even if you just have a checking or savings account open.

Opening a business account can also help you 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. We think credit unions like PSECU are a great place to start.

 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 upfront (i.e. 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 terms and any invoices you receive. Pay vendors on time or early. On invoices, you may see terms such as “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. On big purchases, that 2% can add up to significant savings.

 Get a business credit card and utility accounts

Some financial institutions have credit cards available to small businesses. As with personal credit cards, you’ll want to control spending. Use the card for small 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’ 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.

Familiarize yourself with Dun & Bradstreet

Just as you have personal credit reports, businesses can have credit reports, as well. 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, such as if you pay on time, financial statements, status, sales records, etc.

 Start slow and have 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 handle the larger payments) increase. Even the best entrepreneurs face challenges, so set up contingency plans to get through tough times. Don’t forget the free and low-cost resources we noted earlier and remember that asking for help from those who have been in your position is a great way to get ahead.

D-U-N-S® is a registered trademark of Dun & Bradstreet International, Ltd.

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The content provided on this page is for informational purposes only. Nothing stated is to be construed as financial or legal advice. PSECU recommends that you seek the advice of a qualified financial, tax, legal or other professional if you have questions.