Building business credit is crucial for small businesses as it enhances their ability to secure financing opportunities and improves financial stability. A strong credit profile can lead to better interest rates, higher credit limits, and more favorable terms from lenders and suppliers. This financial flexibility supports business growth and operational stability.
However, business owners often worry about the time required to build robust business credit. New businesses face challenges due to the lack of credit history, making the process longer and more challenging compared to established businesses.
This article covers the importance of building business credit, the benefits it brings, and the concerns regarding the time investment needed for developing a strong credit profile.
How Fast Can You Build Business Credit?
Building business credit can be more time-consuming for a new business compared to an established one because new businesses are starting from scratch. Established businesses already have proven financial records, making it easier to secure credit. The stages of building business credit include:
- Establishing Credit History: Start by opening business accounts and securing small lines of credit.
- Building Trust with Lenders: Consistently pay bills on time and manage debts responsibly to build credibility.
- Achieving and Maintaining Strong Business Credit: Regularly monitor credit reports, maintain low credit utilization, and continue to meet financial obligations to sustain a strong credit score.
Timeline for Building Business Credit
Whether you are just starting to launch your business plan or need to improve your business credit, here is a realistic timeline to strengthen your score.
6-12 months
In the first 6-12 months of establishing business credit, a business can realistically open business credit accounts, secure small lines of credit, and start building a credit history. Using business credit cards responsibly and making timely payments to vendors are crucial in this stage, as they demonstrate creditworthiness and reliability to lenders and credit bureaus.
1-2 years
In 1-2 years, businesses can become eligible for higher credit limits and additional business credit cards. This stage is critical for gaining lenders’ trust by demonstrating consistent, responsible credit use and timely payments. As businesses establish stronger credit profiles, they can explore alternative business loans, such as SBA loans or lines of credit, to further build their credit. This expanded access to financing supports growth and enhances financial stability, reinforcing lender confidence.
2+ years
Consistently building business credit over two years and beyond leads to a solid credit profile, characterized by higher credit limits, lower interest rates, and favorable loan terms. This strong credit standing enhances the business’s financial stability, enabling easier access to capital for growth opportunities and providing a competitive edge in securing financing and negotiating with suppliers.
Factors Impacting the Speed of Business Credit Development
Age of the Business
As the adage goes, good things take time. New businesses are starting from scratch with their credit history and need time to show a pattern of timely payments and vendor relationships to establish credit. Newer businesses face challenges due to a lack of credit history and financial track record, leading to slower credit-building progress and more difficulty securing favorable terms from lenders.
Frequency of Credit Utilization
Frequent and responsible use of credit significantly impacts credit development. Regular use of business credit cards and loans, coupled with timely payments, helps build a positive credit history, so irregular use of credit cards and no financing or lines of credit will slow down the speed your credit score builds.
Diversifying Credit Options
Having various types of credit accounts – such as credit cards, lines of credit, and vendor accounts – benefits a business by showcasing its ability to manage diverse financial obligations. Diversifying credit options speeds up credit building by providing a comprehensive credit history, demonstrating financial stability and reliability to lenders, and improving the business’s overall credit profile. The more diverse credit options your business has, the quicker you will watch your business credit score grow.
Industry of the Business
The industry in which a business operates can influence credit building due to varying risk factors and payment practices. Industries with stable cash flows and low-risk profiles, like healthcare or professional services, may build credit faster than those with higher volatility, such as construction or retail, where payment delays are common due to project-based work or inventory turnover.
How to Speed Up Business Credit Building
These actionable tips can help your business build its credit score as quickly as possible.
Separate Business and Personal Finances
Keeping business and personal finances separate is crucial for financial clarity, legal protection, and accurate accounting. To ensure this, establish a separate business bank account, obtain a business credit card, and maintain meticulous records of all business transactions. Avoid mixing personal and business expenses, use separate accounting software, and regularly reconcile accounts to track income and expenses accurately, fostering financial organization and transparency.
Legally Establish a Business Entity
Legally establishing the business as an LLC or another entity provides liability protection and separates personal assets from business debts. Obtaining an Employer Identification Number (EIN) is crucial, as it distinguishes the business for tax purposes. This legal structure and unique identifier help build business credit by establishing legitimacy, facilitating financial transactions, and ensuring compliance with lender requirements.
Open a Business Bank Account
A dedicated business bank account is essential for separating personal and business finances, ensuring accurate accounting, and facilitating financial transparency. By establishing a clear financial record for the business, including regular deposits and transactions, it helps build a solid credit history. Lenders can assess the business’s financial health more accurately, improving its creditworthiness and access to financing.
Gain the Trust of Vendors and Lenders
To build relationships with vendors and lenders, prioritize timely payments, communicate openly about financial needs and capabilities, and seek to establish long-term partnerships. Positive relationships foster trust and goodwill, potentially leading to extended credit terms, better loan terms, and increased credit limits. Lenders and vendors are more likely to offer favorable terms and support credit-building efforts when they perceive the business as reliable and trustworthy.
Pay Your Bills on Time (or Early)
Timely bill payments are crucial for maintaining positive vendor relationships and building strong business credit. Early payments demonstrate financial responsibility and reliability to creditors and credit bureaus, resulting in a positive credit history. This, in turn, can lead to higher credit scores, lower interest rates, and better loan terms, enhancing the business’s overall financial health and credibility.
Monitor Your Credit Report Regularly
Regular monitoring of business credit reports is essential for detecting errors, inaccuracies, or fraudulent activity promptly. By reviewing reports regularly, businesses can identify any issues that may negatively impact their credit standing and take corrective action. Timely resolution of these issues ensures the accuracy of credit information, maintains a positive credit profile, and safeguards the business’s financial reputation and credibility.
Explore Business Loans and Lines of Credit
Obtaining business loans and lines of credit provides essential capital for growth, expansion, and operational needs. These financial tools, when managed responsibly, demonstrate the business’s ability to handle debt and generate positive cash flow. Regular payments on loans and lines of credit contribute to building a positive credit history, improving credit scores, and enhancing the business’s overall creditworthiness. This, in turn, increases access to future financing opportunities and better loan terms.
