You have finally decided to embrace your true calling. And now you are on the verge of starting your very own business. You have never been this excited or scared in your life ever before. Because starting a new business has its own set of challenges— the biggest being where is the money going to come from?
Securing the finance required to get your new business off and running is an uphill climb. That’s why for budding entrepreneurs looking for financial support, understanding business credit, how
to use it, its implications, and its role in new business loan approvals cannot be stressed enough.
In this blog, we’ll understand the importance of business credit and how it plays a role in obtaining loans for new businesses.
Basics of Business Credit
Before we dive into the specifics of business credit and its impact on your business, it is important to first understand what business credit really is. In layman’s terms, business credit is a financial report card for your company.
It’s a detailed record that demonstrates whether or not your business has responsibly handled its financial obligations, including payments to vendors, suppliers, and lenders.
Like individuals have personal credit scores, businesses have credit profiles, and these profiles are maintained by credit bureaus, which is then used by lenders to determine whether your business is a reliable borrower or not.
Importance of Business Credit for New Businesses
When starting a new business, you may not have the personal savings or annual revenue needed to cover all your expenses. This is where loans for new businesses come in for the rescue.
Whether it’s renting office space, purchasing equipment, or funding initial operations, loans for new businesses can give your business the jumpstart it needs.
But, like always, there’s a catch. Lenders need assurance that you are capable of repaying the loan, and business credit is their go-to indicator. Here’s why:
1. Builds Trust with Lenders
Lenders talk numbers. They evaluate risk thoroughly before approving any loans for new businesses. Having a strong business credit profile signals that your business is financially stable and is being managed responsibly.
This increases the chances of getting your loan for a new business approved. Additionally, good business credit can even result in better loan terms, like lower interest rates or higher borrowing limits.
2. Separates Personal and Business Finances
When starting a new business, using your personal credit to secure funding can be a tempting prospect. Never fall for that. Building business credit ensures that your personal finances remain separate from your business finances.
This separation creates a level of protection for your personal assets in case your business faces financial difficulties.
3. Opens Doors to More Funding Options
A solid business credit score can help you qualify for various types of loans, including SBA loans, traditional bank loans, and alternative financing.
It also makes it easier to work with suppliers and vendors who might offer better payment terms if they trust your financial reliability.
Building Business Credit as a New Business Owner
Now that we’ve understood why business credit matters, let’s discuss how you can build it from scratch. Most new business owners believe they can’t establish good credit until their business is more established, but that’s a myth. Here’s how you can start building business credit right away:
1. Register Your Business Properly
To build business credit, your business must be legally registered. This means choosing a business structure (LLC, corporation, etc.) and obtaining an EIN (Employer Identification Number). These steps make your business an independent legal entity, which is essential for creating a separate credit profile.
2. Open a Business Bank Account
Separate your personal and business finances by opening a business bank account. This shows lenders that you’re serious about your business and lays the groundwork for managing finances professionally.
3. Apply for a Business Credit Card
Even if your business is brand new, you can apply for a business credit card. Use it for small, manageable expenses and ensure timely payments. This helps establish a positive payment history, which is a key factor in building credit.
4. Work with Vendors That Report to Credit Bureaus
Not all vendors and suppliers report your payment history to credit bureaus, but those that do can help you build credit. Research and partner with vendors who report and make payments on time to improve your credit profile.
5. Pay Bills on Time
Whether it’s your utility bill, rent, or loan payment, paying on time (or early) demonstrates financial responsibility. This simple habit significantly impacts your business credit score.
Business Credit and Loan Approvals
Let’s discuss the direct connection between business credit and getting loans for new businesses. When you apply for a new business loan, here’s what lenders will typically look at:
1. Credit History
Lenders review your business’s credit report to assess how well you’ve managed past financial obligations.
2. Credit Score
Your business credit score can determine whether your loans for new businesses application are approved or rejected. It can also affect the loan terms offered.
3. Debt-to-Income Ratio
Lenders evaluate whether your business has sufficient income to manage additional debt. A strong credit profile improves their confidence in your repayment ability.
Real-Life Example
Imagine two entrepreneurs applying for loans for new businesses. One has established business credit, while the other has no credit history. The entrepreneur with good credit is likely to receive approval faster, possibly with a lower interest rate.
On the other hand, the one without credit might struggle to find a lender willing to take the risk or end up with a higher interest rate that strains their finances.
Ignore Business Credit at Your Own Risk
New business owners that neglect the importance of business credit are setting themselves up for failure.
Limited Funding Options Without a solid or at least decent credit history, lenders are likely to reject your application or offer unfavorable terms when you apply for loans for new businesses.
Higher Costs Poor or no credit score increases the chances of lenders asking for higher interest rates and fees.
Stunted Growth Without access to affordable loans, scaling your business in the future will become harder, if not near impossible.
Conclusion
Building strong business credit is not just an advantage but a necessity for new business owners seeking loans for small businesses.
It establishes trust with lenders, separates personal and business finances, and opens doors to more funding opportunities and annual revenue generation.
By registering your business, opening a business bank account, using a business credit card responsibly, and paying bills on time, you lay the foundation for a credible financial profile.
Ignoring business credit can lead to limited funding options, higher costs, and stunted growth. Prioritize establishing and maintaining good business credit to secure the financial future of your business.
