Having access to a decent amount of capital is crucial when you start a business. Although it would be nice if you could bootstrap everything at little to no cost, that’s just not how it works.
Even if you can avoid expenses at first, there will come a time when you’ll need some decent funds to move forward. For example, when you need to hire staff, buy equipment, or get an office, unless you have a personal savings account to draw from, you’re going to need business credit.
How business credit works
The process of being approved for a line of credit for your business can vary depending on the type of entity you formed, as well as other factors. For example, if you’ve just formed a new LLC or corporation, lenders will look at your personal credit history to make their decision. However, if you have an established business with a credit history, lenders will look at your business’ credit to determine your approval and for how much.
4 tips for building business credit smoothly
When you need to build business credit from scratch, you’ll need to start by cleaning up your personal credit. If your business has credit history, focus on fixing that first. Once you’ve done what you can, start building credit incrementally.
Here are some tips that will help you through this process.
-
Get a copy of your credit reports
The first thing you should do is get a copy of both your business and personal credit reports. The Fair and Accurate Credit Transactions Act (FACTA) gives you the right to get one free copy of your credit report each year from each of the three main credit bureaus (Experian, Equifax, and TransUnion). You will want to review your reports to ensure they contain accurate information since that’s how lenders will choose to lend you money (or not).
-
Hire an attorney to fix errors
If you review a report and it has inaccurate information, send a request immediately for the information to be corrected. If you’ve already tried to get a credit bureau to make corrections and they have not, consider hiring an attorney.
For instance, if you live in Florida, the Florida Fair Credit Reporting Act requires credit bureaus to provide accurate information and resolve disputes in a timely manner.
An FRCA attorney can help fix errors on your credit report, like unauthorized activity, closed accounts that are reported as open, account mix-ups, outdated negative information, identity mix-ups, and errors in credit limits and outstanding balances.
-
Use available credit for essentials
With any new business, there’s always a risk of failure, so don’t use any credit you obtain for frivolous expenses or things you don’t absolutely need. Just because you have access to a large amount of capital doesn’t mean you need to spend it. Balance your need to build credit with the pace at which you’re growing your business. For instance, don’t start hiring people unless you’re actually at the point where you need extra staff.
The essentials you’ll need will vary by industry and business, but start with the basics, like getting yourself a good computer and ergonomic office furniture to support you through your workday. Where software is concerned, compare plans for the top tools and choose the one that makes the most sense. For example, if you know you’re going to grow your email marketing efforts fast, get a plan that will accommodate that growth.
-
Pay your bills on time in full
There’s a lot of conflicting advice out there for building credit, and one of the biggest myths has been that carrying a balance forward will help you build credit faster. This has been proven to be a myth. When you carry a balance, you end up paying interest, and only the credit card company benefits.
The best way to improve your credit score is to pay your bills on time, in full, and even early if possible. You’ll want to continue using your credit accounts, but don’t carry a balance if you can avoid it.
It takes time to build credit, but keep at it
You can expect to spend a little bit of time building credit for your business, so keep the ball rolling. If you qualify for a credit limit increase, take that offer because it will look good on your report. Building business credit is a long-term process, but with patience and responsible spending, you’ll get the credit score you need to move forward with more important aspects of your business.
