Establishing an excellent credit history is generally a topic of interest for consumers looking to borrow money in the future, but the same focus is as important for your business. If you only have a few examples of borrowing to demonstrate your business’s financial management, it may be difficult to secure the funds you need to improve and grow your business. If the situation continues, the outcome will not only be bad news for your company but the economy will take a hit with fewer jobs generated and less overall productivity.
Building an excellent credit history won’t happen overnight. How well you repay your business loans is the cornerstone that reassures banks and other lenders of the stability of your business and the foundation on whether to lend to you in the future. One simple way to begin is by using a business credit card.
Business Credit Cards
The first question you may ask is why you shouldn’t use a personal credit card and opt for a business credit card for your company expenses. The most important reason is that the history will be applied to your business rather than to you personally. While the responsibility of the account falls on the company owner, the history will be established in the name of your business. In addition, card companies offer tools, perks and rewards that are specifically designed to benefit businesses. If popularity is any indication of their usefulness, an estimated 60 percent of small businesses use one.
Both small companies and large corporations may find business credit cards a convenient business tool. They are particularly helpful for startups and small businesses because of the ease of securing one as opposed to a bank loan that may require collateral or an already established credit history. Major corporations with annual revenues over $25 million are better qualified for corporate credit cards, commercial loans and other financing options.
Missing Trade Lines
Credit histories for consumers include various accounts referred to as trade lines. These include credit accounts such as car loans, credit cards, mortgages and personal loans. While this information comprises a large part of an individual’s credit score, this type of data may not be reported to the credit bureaus for a business, leaving the job to fill in the gaps in their credit history to the business.
You’ll need to contact the three credit reporting agencies to review what’s on each business credit report and ask how to add trade lines that are missing to increase the depth of your credit history. Here is the most probable trade lines omitted from your business’ credit history.
- Freight or Shipping Companies
- Communication Services
- Website Developers and Managers
- Consultations and Marketing
- Office Supply Companies
Fix Credit Report Errors
With your businesses credit reports in hand, it’s an opportune time to check for discrepancies and begin the process of having them deleted or corrected. Errors on your reports can misrepresent how well your business is doing and make it more difficult to get the credit you may need. Contact the credit reporting agency when there are any of the following: a debt listed that’s been paid off, a late payment that never happened, any unknown accounts listed, etc. The agency whose entry you’re challenging has up to 90 days to respond and defend or remove it from the report.
Short-term Business Loans
For an established business, another option to help establish a credit history is to apply for a small loan or line of credit from your local bank. By using a short-term loan rather than a long-term loan, you will be completing the terms of the loan sooner, lengthening your credit history and improving your credit score. Make every payment on time and work to repay the loan ahead of schedule to build a positive history and earn a good credit rating.
Responsible Financial Management
The bottom line to a successful campaign aimed at establishing a credit history for your business is that none of it matters if you don’t practice responsible money management habits. Never use more than 40 percent of your available credit. In other words, if you have a twenty thousand dollar credit limit, your balance should be kept under eight thousand. Using too much of your limit may send the wrong message that you have trouble handling your finances. Pay the account off every month, whenever possible; if you need to carry a balance, make sure your bill is paid on time every month.
This credit history building strategy should be personalized for your particular needs. Never open a new account just for the sole purpose of adding a trade line. Use credit responsibly and you will be rewarded with a healthy credit history and a great credit score that will showcase your company’s ability to manage finances and will be a benefit when you need to borrow in the future.
Noreen Ruth writes for www.wowcreditcards.com and numerous financial-related blogs and websites. She is interested in educating consumers about using credit responsibly and about legislative action that will affect their ability to borrow the money they need. She has contributed hundreds of articles to various online sites that provide content to inform consumers on credit cards, debt relief services, loans and other finance related topics.