The establishment of a business is thrilling endeavor, filled with creativity and potential – with one significant step that may seem overwhelming; applying for business credit. This is one of the critical first steps to be prepared to access funds to build on your dream. Often, first-time small business owners are making similar mistakes that can result in being denied credit, or strict terms and conditions. No need to fear, we will get you through the navigation! Onwards and upwards, we will ensure your business gets off to a great start.
Why Business Credit Matters for Entrepreneurs
Ah, business credit–the magic ingredient to help your business grow or become a number in the statistic sheet. For any entrepreneur, understanding business credit is like a compass guiding you through the sometimes chaotic world of business financing. It is more than getting a loan, it’s a credible identity, managing cash flow, and opening the door to financial opportunities that would propel your growth. Business credit can sway suppliers opinions of you, influence loan interest rates, and affect partnership opportunities. Business credit is a key element to help separate yourself from competition and allow your business to take great leaps forward!
7 Mistakes That Business Owners Make with Business Credit
Mistake #1: Mixing Personal and Business Finances
It is important to keep personal finance and business finance separate, both for mental well-being and for record-keeping purposes. When the two are mixed, it is all but impossible to keep track of business expenses accurately. This can disrupt financial reporting and tax efficiency. Plus, your credibility as a business owner decreases because lenders and investors like to see that a business, or an individual running a business, has a clear boundary between personal and business finances. Open up a dedicated business bank account, and you will enhance your credibility!
Mistake #2: Applying Without Establishing Business Legitimacy
When it comes to obtaining business credit, legitimacy is key. Lenders want to see that you have a real business, and to do this you must create a professional identity. Make sure the business name is registered, have a registered business address (and not your home address if you can help it), a business phone line, and a website. These things may seem minor, but adding them all together creates a professional and determined-looking business context for the lender.
Mistake #3: Applying for Too Many Credit Accounts at Once
While it can seem like a good idea to apply for multiple credit lines at once in order to cover all your bases, make sure you are careful. Each time you apply for credit, the lender will do a credit inquiry, and too many inquiries can be a detriment to your credit score. Instead, do your research for the best credit account that works for you and start there. Once you build a track record of responsibly using credit, you will naturally be able to establish credibility with various lenders to obtain lines of credit in the future.
Mistake #4: Ignoring Vendor Credit and Net 30 Accounts
A lot of business owners do not consider vendor credit, or net 30 accounts, as a consideration for building business credit. However, vendor credit can be an excellent way to pay for goods and services at a later date while establishing a track record of timely payments. When choosing a vendor for those options, consider net 30 accounts (which allow for a payment plan to pay for an item within 30 days of your purchase). Having a net 30 account with a vendor can demonstrate your responsible tracking with credit and services, and further help your credit profile. Don’t miss these opportunities to establish a strong credit!
Mistake #5: Poor Payment Habits
Always paying late can ruin your business credit profile. The timely payment of debts is the most important factor in having a great credit score and demonstrates reliability. To help with payment there are products that can automate payments or send reminders. If you are ever having cash flow problems, I always encourage the business to pay at least the minimum payment to avoid harming their credit history. Each time the bill is paid on time, your creditworthiness increases, creating a better platform for future financing: either through credit cards, business lines of credit, or loans.
Mistake #6: Not Monitoring Business Credit Reports
Like you may already do for your personal credit report, you should also check your business credit reports regularly. Dun & Bradstreet, Equifax, and Experian are among the agencies that create these reports. If you check your reports regularly, you may discover errors or possible fraudulent activity that can negatively impact your credit. Even if you do not check as frequently, knowing your business credit report allows you to correct any problems accurately and think carefully about your borrowing decisions.
Mistake #7: Applying Without a Solid Financial Foundation
Applying for credit when your financial position is weak can be a gamble. Before applying, make sure your business has a reliable stream of revenue and is aware of how cash flow works. Make sure you have a solid financial plan and accurate records to showcase your business’s opportunity to repay its debts with confidence. Taking the time to do this will not only put you in a better position to get approved for credit, but will demonstrate your greater business plan associated with your ongoing business objectives.
Taking these common missteps out of the equation will position you to be able to maximize the use of business credit. With preparation and some thoughtfulness, you will be able to generate a solid credit profile, to help you to succeed and grow your business long term.
How to Improve Your Chances of Credit Approval
Obtaining business credit may seem challenging, but with some and some thoughtful work, you can clear a path toward acquisition. Below, you will find a list of reasonable actions that can increase your success rate:
1. Understand Your Credit Scores. Before applying for business credit, you should become extremely familiar with your personal scores, and business credit scores. Creditors will underwrite a credit decision based on those scores, so it is crucial you have some understanding of where you may fall.
2. Pay off Your Debts. If you have any lingering credit debt, pay your debts off or at minimum substantially lower them. Reducing outstanding balances not only will help improve your score but also show potential creditors you are a good steward of finances.
3. Develop a Business Plan. Lenders want to see you are not only thinking about the future, but there is an action plan for your future. Develop a business plan that details your existing goals, your game plan, and how you are going to use the money you are applying for. You can also create a financial forecast to help build confidence in their decision to lend to your business.
4. Collect the Required Documents: Different lenders may demand various paperwork but you should be ready with:
– Financial statements
– Tax returns
– Business licenses
– Copies of leases or contracts
Having these documents ready will make the application process easier.
5. Build a Relationship With Your Banker: Having a great relation with your banker can positively affect the outcome of your credit application.
6. Think About Timing: Timing can be everything. Do not apply for credit when your organization is in financial distress or immediately after taking another loan. When lenders check for financial stability, they are looking for consistency so think strategically about timing.
Conclusion
Applying for business credit is a big step for entrepreneurs ready to scale their operations and achieve their vision. But the application process has its unique challenges. Knowing some common mistakes and how to not make these mistakes will help position you for success.
Taking a little time to raise your credit score, writing a comprehensive business plan, having your ducks in a row, and cultivating relationships with financial institutions are all best practices to improve the chances of success. By following this steps, you are improving your credit application, but also showing the lending institution you are serious, organized and ready to grow your business!
Mistakes will certainly come, but allowing them to be the teachers as opposed to the blocks can make all the difference. So, step with confidence, apply the insights , and watch your business grow with the right capital! To your success in the fast-moving financial world!
FAQs
Why are Net 30 accounts important for building business credit?
Net 30 accounts are important because they enable you to fulfill invoices in a thirty-day time span while demonstrating your fiscal responsibility. If you make regular payments and pay within a consistent timeframe, you will create a positive payment history, contributing to a solid business credit profile. Net 30 accounts also offer vendors that report your payment activity to business credit bureaus which helps build your creditworthiness even further.
How often should I check my business credit report?
You should keep an eye on your business credit report! Come up with a plan to check in at least every three months. Checking in regularly allows you to identify errors, see how your financial health stands, and make sure no unauthorized accounts are opened in your business name to protect your financial reputation.
Does applying for multiple credit accounts hurt my business score?
Yes, seeking multiple credit accounts over a brief time span will have an adverse effect on your business credit score. Each application generally leads to a hard inquiry which will have a temporary negative impact on your score. Be deliberate and apply only for the credit you actually need to limit unnecessary inquiries.
How can new businesses improve their credit approval chances?
New companies can increase their chances of being approved by:
– Keeping a good business plan.
– Setting up a separate bank account for the business.
– Working to build relationships with vendors and suppliers.
– Slowly applying for credit and managing credit well.
– Ensuring all business information is updated and consistent.
What financial documents do lenders look for when approving business credit?
Usually, lenders examine:
– Financial statements, which include balance sheets, as well as income statements.
– Cash Flow projections
– Tax returns, typically from the past two to three years.
– Any outstanding debts/liabilities.
– Business licenses and permits.
What credit can I get with EIN?
Once you have an Employer Identification Number (EIN), you can apply for vendor credit, business credit cards, and some financing, such as business loans. An EIN allows you to differentiate your business as a legal entity, which is useful for developing credit separately from personal credit.
What credit score do I need for a business card?
The majority of business credit cards require a good personal credit score, and typically that means 680 or higher. There are options for individuals with fair credit, but do remember credit requirements can be slightly different from lender to lender.
Do banks look at business credit?
Definitely! Banks regularly look at your business credit when you apply for a loan or credit line. A strong business credit profile can lead to more favorable terms and a lower rate, so it’s important to keep a good credit score.
