Credit is an incredibly useful tool. It allows individuals and businesses to make purchases they otherwise would have been unable to, allows a loan servicer to evaluate the reliability of a person, and allows big purchases to be paid over long periods of time.
“For many businesses, credit is an absolute essential, allowing them to put in place systems that can grow their business, assist their consumer, and even take calculated risks.” – George Fraguio, Vice President of Bridge Lending, Vaster Capital
However, credit also comes with a credit score, and establishing and building a good credit score for your business can be a daunting, and even frightening task. Luckily, there are a number of easy strategies for establishing and building your business credit score.
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What You Purchase
What you purchase with credit can be one of the best ways to establish and grow your business credit score. One of the surefire ways to quickly establish your credit score is to make a small number of large purchases. Large purchases are things like vehicles (delivery vehicle, company car), high-end appliances (espresso machine, oven, even some printers), or even a building.
“If you decide to go the route of making large purchases to build your score, try to avoid overusing credit to purchase small things. Focus on paying these large purchases off each month, and DO NOT miss a payment.” – Lina Miranda, VP of Marketing, AdQuick
This process allows you to establish a diverse number of accounts, all with regular repayment. Doing so allows you to appear to lenders as a reliable entity, and will improve your credit score and likelihood for receiving loans in the future.
Additionally, this process allows your business to worry more about getting off the ground than outright buying high-priced investments early on. If you need to, you can always pay off the purchase early.
Let’s say you don’t want to make big purchases to build your credit. Maybe you were already supplied the large investments, you wanted to own them, or investors already supplied them to you. One of the best ways you can build credit as a business is through gas.
“Every business has a gas business expense. Whether it’s driving to the workplace, picking up supplies, going to meetings, gas is a nearly universal transportation cost. Luckily, gas does not put a huge stress on most businesses, but can be a useful tool for building credit reliability.” – Brandon Lurie, Marketing Director, Y Meadows
Setup a gas credit card (or a number of gas credit cards) for your business, and use it every time you fill up your tank. You can either pay these off immediately, or ensure you pay them off each month. This can help you create a good length of credit without placing financial stress on your business, and can produce regular reliability for paying off loans and debts.
Additionally, there is a business benefit that goes hand-in-hand with utilizing credit for gas. First, most gas credit cards offer rewards, meaning your business could end up saving significant money on gas purchasing. More importantly, however, many businesses are able to write-off the cost of their gas come tax season.
Almost every major credit provider has purchase tracking, allowing businesses to see all purchases, generate a report, or create their own report based off of the tracking. Tracking your gas allows you to confidently write off your gas costs at the end of the year without fear of being audited by the IRS.
“One of the things lenders look for, and a large piece of your credit score, is a diverse portfolio of credit accounts that are paid on time. This goes beyond just using a company card, or having a building loan/mortgage that your business is paying off. For many businesses, this can be well achieved by utilizing credit with suppliers.” – Patricio Paucar, Co-Founder and Chief Customer Officer, Navi
Almost every business has a supplier of some sort. Whether it’s a food supplier, clothing supplier, or even office supplies, every business needs something in order to function. Many suppliers offer the opportunity for your business to open a credit account with them. This means that rather than putting in your order, going to a checkout screen and typing in a card number, you have an established account that you pay off either in full, or in installments at the end of the month. Some suppliers even offer membership-style plans wherein they send you the same goods each one-to-three months and automatically charge it to your associated credit account.
“Setting up a credit account with each of your suppliers allows you to diversify your credit accounts at a fairly low risk. These basic business necessities now become part of your portfolio, are more easily and reliably purchased, and can help build your portfolio.” – Karim Hachem, VP of eCommerce, La Blanca
Don’t let mistakes go unnoticed, or unattended to, especially when it comes to your business credit. There are a number of examples of this.
One of the first examples of a credit error that will affect your business credit, is when a payment was paid. If your business has a monthly payment with a credit lender of $200, you paid it before it was due, but your system says it was paid late, dispute it with your provider. This may seem unnecessary, but these late payments can pile up and have significant effects on your credit score.
“Fraud is another common error, and one that can severely hurt your business if left under the radar. Keep an eye out for any suspicious purchases utilizing company credit cards or credit lines. If you didn’t make it, or if you didn’t receive the product ordered, dispute it immediately and go through the proper channels to remedy the issue with your lender.” – Alex Wang, CEO, Ember Fund
Lastly, interest rates. Your interest rates for most credit types are locked in when you apply for the loan or line of credit. If your interest rates increase without notice, dispute this with your provider.
You need to have an employee, or position in your business that manages business expenses. This means being focused on all of your business’s credit lines, knowing payment dates, amounts, revolving utilization, and how much your business has in the bank vs how much it is bringing in.
“The quickest way to ruin your business credit is to regularly miss payments, forget to pay off some of your lines of credit, or pay late. While having a number of credit lines can be highly beneficial for your business credit, if you begin to lose track of them, it can do far more damage than good.” – John Diep, CEO, LA Startups
Having an employee whose position is to manage all credit and financial lines, who is equipped with a proper management system and understanding of how the credit and banking industry works will keep your business consistently above water, and will prevent you from unnecessary loan stress.
In many ways credit is simple, yet it also has a number of complexities, fine prints, and evolutions that can either positively, or negatively affect your business. If you want to succeed as a credit-utilizing business, and want to establish and build credit rather than cause detriment to it, you need to educate yourself regarding credit and the credit industry.
Talk to lenders, talk to professionals, and do your own research online. If you see a term you don’t understand, research it. The more you know, the less opportunities for you to get into a detrimental situation. You may even want to consider hiring a financial assistant.
When you are well educated, use proper practices, and have a well-managed business, your credit will be in a healthy space.