How to Establish Business Credit

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Business owners make many investments in their companies. They buy equipment to improve operations, invest in ads to get more visibility, and workers for enhanced productivity. Some businesses can tap into their reserves to make these investments, but others get business loans for some of these expenses. Lenders won’t give their money to anyone and will do their research to avoid unfavorable scenarios. Financial institutions will check your business credit before letting you borrow funds.

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What is Business Credit?

Business credit gives lenders insight into how effectively you can manage debt. Lenders want this information before giving you a loan since their capital puts you in more debt. Banks only generate an ROI on their loans if business owners repay them fully. When lenders see applicants with high business scores, they feel more comfortable giving you money.

Why You Should Establish Business Credit

Many businesses borrow money from banks to fund short-term expenses and long-term investments. Establishing credit helps you get money from financial institutions, but credit building presents other benefits as well.

Separate Personal and Business Finances

Business owners borrow money for their companies, but some also need money for a mortgage or auto payment. Bundling all of these expenses into your personal credit can hurt your score. In addition, taking out business loans with your personal credit can impact your ability to get a personal loan in the future. A business credit score helps you separate personal finances and business finances. One won’t impede the other. 

Get Better Terms with Lenders and Suppliers

Lenders and suppliers like to work with business owners who have strong credit. They feel more confident in your ability to repay financial obligations and will reward you with more favorable loan terms. High-credit borrowers can save money on their loans and have more choices than their low-credit counterparts.

Qualify for Higher Loan Amounts

Some lenders will give you capital, but not enough for what you need. Business owners in this predicament may have to delay equipment purchases and hold off on vital assets. Business owners with established credit have a better chance of getting the money they request. Lenders award high loan amounts to business owners with strong credit. Building your credit over time can help when you need money the most.

Get Cheaper Financing

A business credit score can help you secure cheaper financing than using personal credit for the same small business loans. Cheaper financing gives you more flexibility with cash flow and makes it easier to repay the loan.

Get Lower Interest Rates

Lenders set interest rates to earn returns on their investments. They charge higher rates for low-credit business owners to collect more money upfront to cushion the blow from a loan default. Lenders who give money to low-credit businesses have more control in that relationship. Fewer financial institutions will accept low-credit applications. This dynamic lets them set higher interest rates. Payday and title loan lenders set the highest interest rates in the industry because their borrowers typically have no alternatives for financing.

When you have established business credit, you gain control. Lenders know you can walk away from them and get a loan from another bank. They don’t want to lose business owners who can reliably pay loans. It’s an easy return on investment for them, and the lenders hope these business owners will take out more loans in the future. Banks will offer lower interest rates to persuade you to work with them instead of a competitor. The lower interest rates can save you thousands of dollars over the loan’s lifetime. 

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Pay Less for Business Insurance

You don’t need a business credit score to obtain business insurance, but a good score can lower your premiums. Insurers assess your credit score like lenders. They charge lower prices for business owners with high credit because they want reliable monthly payments. Insurers will charge more if you do not have established business credit. A bad credit score is a worst-case scenario. Insurers will set higher premiums for low-credit businesses to collect more money. Insurers want to squeeze out every last dollar before a low-credit business owner stops paying. If the low-credit business owner continues paying for years, it’s a nice bonus for the insurance company.

Insurance companies incur risk with each policy they write. Establishing business credit makes you a less risky candidate and results in lower premiums. Reducing expenses, no matter how big or small can help your business. The increased positive cash flow makes it easier to pay workers, buy equipment, and keep up with financial obligations.

How to Build an Established Business Credit

You only get the wonderful perks of high credit if you build it over time. Business owners can use several strategies to build established business credit.

Register Your Business

Any LLC or S-Corp business must be officially registered with their state. You can still register your business with your state even if your business is not an LLC or S-Corp. You will need this business registration to start building business credit.

Get Your D-U-N-S Number

Credit bureaus use this number to identify your company so you can build a business credit profile. It’s free to request and obtain one of these numbers. In addition, you can apply for a D-U-N-S number on Dun & Bradstreet’s website.

Get a Business Line of Credit or Business Loan

Registering your business and getting a D-U-N-S number establishes your credit profile. Now, it’s time to build your credit. Taking out lines of credit and business loans are two of the best ways to grow your credit, as long as you pay them back. These financial instruments also provide capital that can fuel your investments.

Many business owners turn to Mulligan Funding for their financial needs. Mulligan Funding offers access to several loans optimized for your needs. You can request a free quote (*) (1) and get paired with loan options that align with your financing needs.

Focus on Credit Utilization

Having a large gap between your debt and credit limit will positively impact your credit score. Credit utilization measures this difference, and a ratio below 30% will improve your score. For example, if you have a $100,000 credit limit, make sure you borrow less than $30,000 against your business credit card limit. You can improve your credit utilization by paying debt or getting a higher credit limit.

Pay Early or On Time

Payment history is the most important credit score category. Keeping up with debt payments will improve your score over time and help you qualify for better loans. Conversely, making late payments will negatively impact your score. Fees and interest on the late debt can turn late payments into a bad habit that further hurts your credit score and finances. Only take on debt if you are confident in your ability to pay it early or on time. 

Monitor Your Credit Reports

Business owners improve their revenue and earnings by tracking those numbers each year. Knowing last year’s earnings gives you a benchmark for the following year and inspiration to move in the right direction. Business owners extend this mentality with their credit scores. You can monitor credit reports to track your progress and use it as inspiration to build your score. Checking your business credit report can also reveal errors that are unfairly dragging your score. If you detect any errors, you can file a dispute with the credit bureau to resolve the mistakes. These resolutions can help your credit score.

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