A good credit score is crucial when taking out a small business loan. If you’re in the early stages of planning a business, take steps to establish your credit score now, and help set yourself up for success.
The experts at U.S. Bank have put together these four steps for establishing a small business credit score.
1. Separate your personal and business credit
Sole proprietorships and general partnerships are common business structures, but they sometimes mingle personal and business finances, which means that if you have personal credit problems, they could affect how lenders view your business.
A Limited Liability Corporation (LLC), and other corporate structures, allows you to separate your business dealings from your personal finances and can help to establish credit as a business entity.
2. Develop your business and get financial documents organized
If you’re planning to apply for a small business loan, having a business plan in place is important. Financial documents, such as the balance sheet, profit and loss, and tax statements are required for many types of small business loans.
3. Register to improve your business credit rating
Business credit is reported voluntarily. Even if you have some credit accounts with vendors or suppliers, you might not be on the radar of credit-reporting agencies. Register with agencies, such as Dun & Bradstreet, to be listed in their databases. If you make payments as promised, then a lender making credit inquiries will find a better credit rating for your business.
Also, encourage your creditors to report payment histories to at least one of the business credit-reporting agencies. The more records of a solid payment history, the better for your business’s credit score.
4. Keep your business debt in check
When you open a credit account for your business, follow these basic guidelines to establish and improve your credit rating:
- Keep your debt ratio (the amount you owe versus the amount of available credit) to no more than 30 percent of the credit limit. This demonstrates your ability to have credit without abusing it.
- Pay bills on time. Debt payment history is a key piece of reporting data and essential to maintaining an acceptable credit score.
- Use your credit accounts from time to time to keep your credit active and maintain a credit score. Zero activity on your credit accounts might actually lower your credit score. Your objective is to demonstrate your ability to have credit without abusing it.
Something to note: Though you will be seeking credit for your business, when it comes to small and newer business owners, personal and business credit are both examined. If you don’t have an established business credit history, lenders may look at your personal credit.
Editor’s note: This article was written by our partners at U.S. Bank.
Credit products are offered by U.S. Bank National Association and subject to normal credit approvals and program guidelines. Some restrictions and fees may apply. See a banker for details. Equal housing lender.
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