Bad credit history is one of the biggest fears in adult life. Poor management of debt, even when you were younger, can ruin the possibility of accessing a personal or business loan in the future. On the other hand, the lack of credit history also affects, since banking institutions have no reference to grant or approve loans or lines of credit.
When you decided to become an entrepreneur, this matter probably didn’t cross your mind. However, it is never too late to readjust your financial health and improve your finances to generate business credit. Maintaining healthy debts provides certainty to lenders about your commitment to repay what you borrow in the time and manner agreed upon. Undoubtedly, the road to entrepreneurship is easier if you have access to capital for the development and growth of a business.
Forty-seven percent of entrepreneurs consider that their financing needs are not met. 30% of entrepreneurs who do not apply for financing state that the reason is a low credit score, while 23% mention that the motive is bad credit history, according to information from the Small Business Credit Survey 2021, conducted by the Federal Reserve System.
These circumstances make it impossible for start-up businesses, particularly Latino-owned firms, to access products such as small business loans, working capital loans, inventory loans, and even business credit cards. Receiving financial advice from companies like Camino Financial allows new entrepreneurs to find the right financing product for their needs.
What is business credit?
This concept refers to the credit history that a company generates by using financing through financial institutions. How a company handles credit, loans, credit cards, or trade lines from suppliers determines its business credit and the possibility of obtaining more financing in the future. The reasonable doubt of many entrepreneurs is how do I generate good business credit when my company is starting.
To solve this matter, it is necessary to specify how business credit works. The difference between personal and business credit history is elementary. The first is linked to the social security number or ITIN (Individual Taxpayer Identification Number) and the second to the EIN (Employer Identification Number).
How business credit works
The first step to build business credit is to apply for your EIN number; in the case of people whose migration process is unfinished, they can do it by presenting their ITIN. Subsequently, opening a bank account or applying for a business credit card and handling it correctly is the second step to improve a company’s credit history.
Contrary to what happens with a personal credit score, the business is determined with different parameters depending on the institution that issues it. But generally, the rating range goes from 1 to 100. The main factors that determine this measurement are the following:
– Use of credit
– Payment history
– Length of history
– Years of business operation
– Business size
On the other hand, aspects beyond the control of business owners also come into play, such as bankruptcy rates, lawsuits, and protection of companies in the sector.
Best ways to build business credit
Don’t be afraid of credits; to use them wisely, follow these recommendations for better control of your business:
1-. Register your company
The industry or sector where your project is developed will determine the type of registration you will have to carry out. For example, in some cases, it is done with the Small Business Administration (SBA), and in other cases, you can register with local or state authorities, depending on the size. Performing this process and getting ITIN and EIN will allow you to access financial products to build good business credit.
2-. Open bank accounts and use them to manage your finances
Having a bank account without money is useless in the eyes of credit score rating companies. It is necessary to maintain a constant flow of money. Even if your business receives mostly cash payments, it is advisable to deposit that capital to the bank to record that you are receiving income. This way, you will have positive bank statements and will be able to pay when you apply for small business loans, inventory loans, or working capital loans, for example.
3-. Get a business credit card and use it
All companies have current expenses such as rent, services, or supplies. An excellent practice is to use a business credit card for these assignments and even direct debit recurring payments. In some cases, this practice can also provide benefits such as discounts for early payment.
On the other hand, when your payment date arrives, do not cover only the card’s minimum amount; pay the total cost. This way, you will not be charged any interest. Remember that a financing product that is not used does not help your credit history, but you also have to use it wisely.
4-. Access other financial products
Using commercial loans, working capital loans, inventory loans, lines of credit, or any other financing product and paying them back in an orderly fashion is the easiest way to achieve a better credit history. Keep in mind that if you apply for too many products at the same time and receive constant rejections, it will be reflected in your credit score.
Due to a lack of documentation, some minority-owned businesses cannot access the benefits of traditional bank financing. However, there are other alternatives, such as online lenders, institutions that offer financial products according to the needs of all types of entrepreneurs. Nowadays, the lack of capital should not be a reason to break the entrepreneurial path of any person, investigate different options and get the right financing for your business.