What Is Involved in Building Good Credit for Your Small Business?

Before you can qualify for many loans, you need to build credit. Small business lenders tend to look closely at your credit rating, either to determine whether to approve the loan or to decide how much funding to give you. The better your credit score, the better the interest rates, repayment terms, and total funding you can get. It’s in your business’s best interests to gradually build a solid credit history, but where do you start?

How Can a Startup Business Build Credit?

New businesses face several challenges when it comes to building credit. They have to start with a blank slate. To start building up a good reputation for credit management, the business needs to apply for some financing, but qualifying is difficult without a credit rating in the first place. This cycle can make the process more confusing than it needs to be.

The key to getting started is similar to what you needed to do when you got your first credit card as a teen. Some lenders offer business credit cards for startups that, admittedly, don’t have the best terms. You can start making small purchases that you know you can cover without problems with your savings. For example, purchase office supplies or rent payments with your credit card, and pay off the balance every month right away.

Another option is to get a prepaid business credit card. This offer allows you to “recharge” your credit card by paying up front. Then, you can use the funds like you would any credit card. From a financial standpoint, using prepaid credit doesn’t make much sense, but from the perspective of building credit, it’s a good move for getting started.

Lastly, some lenders with experience financing startups are willing to make exceptions. For example, they may overlook your company’s nonexistent credit rating as long as your credit score is solid. However, you need to be careful with this option because signing a personal guarantee can put your home assets at risk if you can’t repay debts.

What Can an Established Business Do to Build Good Credit?

If you already have a credit rating and some financing tools, such as a business credit card, you can focus on strengthening your credit rating. Even a poor credit history can eventually be erased by following good practices. Pay your suppliers on time, every time. Pay off debts one by one.