4 Ways Small Businesses Can Build Strong Credit

Establishing a strong credit profile for your small business allows you to access the working capital and financing you need to start and grow. As an entrepreneur who has assisted over 100 founders in incorporating and launching their businesses, I want to share several key strategies to begin building robust business credit.

1. Separate Personal and Business Finances Completely

The first critical step is distinguishing your business as a legal entity separate from your personal finances. According to the SBA, over 30 million small businesses operate as sole proprietors, mingling their finances. However, experts strongly advise establishing an LLC or corporation instead. This fully separates your business, providing liability protection and positioning you to build independent business credit.

The process involves obtaining an EIN from the IRS, then opening a checking account and credit card solely for your business. Only make purchases related to operating expenses via the business bank/credit accounts. Keep your personal finances like mortgage payments, car loans and credit cards for household spending. Maintain meticulous records of business income and expenses. Thorough separation and documentation shows lenders you take your business finances seriously.

2. Pay All Bills Early or On-Time, Every Time

According to VantageScore data, payment history accounts for the heaviest weighting (35%) in calculating your business credit score. Get into the daily habit of paying every business bill and credit line early or by the due date. Set calendar reminders for any loan payments, credit cards, equipment leases, business insurance policies, vendor bills and utility expenses. Avoid late fees or service disruptions at all costs, even if funds are tight.

If you fall behind, call the creditor immediately to arrange alternative repayment terms. Per Nav‘s 2021 Small Business Credit Survey, 68% of small business loan and credit applicants were approved after demonstrating responsible bill payment practices. Establishing positive payment behavior from the start creates credibility with vendors and lenders.

3. Utilize a Small Business Credit Card Responsibly

One of the fastest ways to initiate positive business credit history is to open a small business credit card in your company‘s legal name using your EIN. Make occasional purchases related to operating expenses on the card, then pay off the monthly balance promptly and fully. You want to show activity without high utilization rates.

Credit limits for new small business cards often range from $500 to $5000. According to the SBA, you should maintain a credit utilization ratio below 30%. So if your limit is $2000, try to keep monthly balances under $600 before paying in full. Over 12 months of responsible card usage and payment builds your credit profile with positive reporting to bureaus like Experian. This qualifies you for higher credit lines and loans critical for expansion.

4. Explore SBA-Backed Financing Options

One mistake I see entrepreneurs regularly make is immediately applying for large equipment leases or loans from big national banks, before establishing solid business credit. Not only are less than 50% approved, but each application inquiry dings your fledgling score.

Instead, explore U.S. Small Business Administration resources first. The SBA provides low-cost microloans up to $50k and backs bank/CDFI loans up to $5 million with competitive rates/terms for newer firms. This government support offsets risk allowing new businesses to access reasonably priced debt. As you consistently repay SBA-backed obligations over 2+ years, your business credit profile grows, qualifying your company for larger conventional lending options.

In addition to the tactics above, you may consider services providing Authorized User Tradelines after conducting extensive due diligence. While adding positive credit history from an established business can accelerate building your profile, there are compliance considerations. As an expert small business consultant, please reach out with any questions!