Like large enterprises, small businesses also have option to choose from a variety of financing options provided by banks and non banking financial companies (NBFCs). But several studies suggest that small business owners often find it daunting to avail credit to meet working capital needs or improve cash flow situation. The lenders reject small business loans applications for a number of reasons – low credit score, bad credit history, weak cash flow and lack of collateral.
As a small business owner, you can easily enhance your future borrowing potentials by building business credit. The lenders will use your business credit as the key criterion to understand your payment habits and assess your creditworthiness. However, you must remember that business credit building in a continuous process. You must understand all aspects of how to build business credit for small businesses to meet both short-term and long-term financial needs of your small business without paying hefty interest.
7 Ways to Build Business Credit for Small Businesses
1) Keep Your Personal and Business Identities Separated
You can easily establish business credit by providing a distinct identity to your small business. It is always a good idea to get your business registered as a limited liability company (LLC). The incorporation will provide a unique identity to the business. Also, it will keep the business credit history separated from your personal credit history. The separation will make it easier for you to eliminate the impact of any wrong financial decision on your business credit history.
2) Open a Business Bank Account
In addition to providing a distinct identity to your small business, it is also important open a business bank account or current account in its name. After opening the business bank account, you must use it for all financial transactions. You can ask your customers or clients to transfer payments directly to the business account. Likewise, you must make payment to the suppliers and creditors from the business bank account directly.
3) Apply for Credit Early
You must apply for any form of credit from the bank after operating the business bank account for some months. Most banks will hesitate to extend credit facility based on a new business bank account. But you can still apply for a credit line, business credit card, or overdraft facility. But there are a number of NBFCs that provide small credit lines and unsecured business loans to new businesses and start-ups. You can easily create a good credit history of the business by repaying the loans on time.
4) Establish Financial Relationship with Multiple Vendors
You must remember the financial institutions change lending policies and revise interest rates from time to time. When you forge relationship with a single lender, it will become difficult to keep the credit line or overdraft facility open. You must forge financial relationship with multiple lenders to keep the credit line intact and build business credit. For instance, if you are opening the business bank account with a particular bank, it is a good idea to obtain the business credit card from a different financial institution.
5) Make Payment before Due Date
Your personal credit score remain intact despite occasional payment delays. But you cannot establish business credit by paying your bills after the due date. While preparing business credit reports, many bureaus check if the business is paying all bills before due date. You must make it a practice to pay all bills before due date to improve business credit score and history.
6) Improve Your Personal Credit Score
While establishing business credit, you must explore ways to maintain and improve your personal credit score. Most lenders evaluate the personal credit score of the borrower while processing his small business loan. Hence, your personal credit score will impact both your future borrowing potentials and business credit development. You can improve your personal credit score by paying loan installments or credit card bills fully and timely, not utilizing the credit line or limit fully, and not applying for loans frequently.
7) Check the Company Credit Report Regularly
In India, most lenders evaluate a business’s credit history based on CIBIL CCR. CIBIL prepares the CCR based on data submitted by lending institutions across India. There are always chances that the information included in the CCR may not be accurate or up-to-date. You must check your business’s CCR regularly to verify its credit history and identify discrepancies. You can easily establish business credit for your small business by keeping the credit report flawless.
On the whole, you can build business credit for your small business by implementing a number of measures over a period of time. However, it is also important to explore financing options that enable you to meet immediate business needs without establishing business credit. For instance, you can opt for Point of sale financing to raise working capital based on the monthly sales routed through the POS machines, while availing multiple repayment options.