Establishing Credit For Your New Business: Part 2

Business Credit Can Be Obtained
With Little To No Established
Credit Identity

Part 1 Review

Last week in Part 1, we talked about the importance of establishing business credit for your new business entity. We emphasized that having access to cash and credit is a business’s lifeline because business credit allows a company to borrow money that can be used to purchase products or services.

Next, we went over the importance of having a separate legal entity for your business. Then we reviewed the basics of choosing a business structure.

This week we will be exploring the basic types of business credit you can acquire for your newly formed business with little to no established credit identity.

Next Steps

Once your business has been properly formed and in operation, the next step is to apply for credit in your company’s name. A creditworthy business is defined as a company that is considered suitable to receive credit because of a positive history of paying money back. For business owners it’s essential to not only maintain a favorable personal credit rating; it’s equally important in building and maintaining a strong business credit rating as well.

Credit ratings play an important role in our everyday lives. It impacts how much credit or funding we will receive, the rate of interest we will pay, and what the terms of repayment will be. When it comes to owning a business, a creditworthy company takes on a whole new meaning. To be considered suitable to obtain credit, a company needs to show that it can properly manage its financial obligations by having positive business credit scores.

Lenders, businesses, suppliers, and vendors use business credit reports as a risk assessment tool when determining whether or not to extend credit to a business and at what terms. A business without a rating or business credit file may find it difficult to obtain credit. Then how does a new business establish credit?

There are several basic types of business credit you can acquire as a newly formed startup or existing business with little to no established credit identity.

5 Ways To Establish Credit For Your New Business

Vendor Credit

Vendor credit is when an individual or business offers products or services that your company can purchase on short term financing (typically net 30 terms). There are many vendors willing to extend credit to startups with minimal requirements. In some cases, a vendor may require an initial purchase or deposit prior to extending credit terms.

Supplier Credit

This type of business credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This type of financing is great for conserving cash flow because it gives you time to sell the products you receive from the supplier before having to pay for them.

Retail Credit

Many small and major brand retailers offer store credit cards for businesses. Unless they’re co-branded, the card can only be used in a specific store. This type of business credit may make sense if you have a specific store you regularly use for business purchases.

Service Credit

The easiest form of business credit you can establish for the first time is service credit. Your Internet, cell phone, cable, satellite TV, web hosting, and other utility services are all agreements your company makes with providers.

Business Credit Cards

One of the most important tools to keep your personal and business purchases separate is a secured or unsecured business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so you can protect your personal credit as well. If you use your car for business on a regular basis, consider using a business fleet fuel card. Fleet fuel cards are mainly used for gasoline and diesel fuels at gas stations. Some fuel cards can also be used to pay for auto maintenance and expenses.

It is critically important to pay all your bills and invoices in a timely manner when establishing credit for a new business. Although each business credit reporting agency collects and receives its data differently, the trade references your company establishes can be used on future credit applications.

You should closely monitor your business credit reports and scores on a regular basis to ensure the information reporting is accurate and up to date.

Remember, by establishing business credit, banks, lenders, suppliers, retailers, insurers, and investors will now be able to better access the viability and creditworthiness of your business. Ultimately, your business credit report will impact the amount of credit, payment terms, interest rates, and insurance premiums your business will pay.

By establishing a creditworthy company, your business is building a powerful financial asset that taps into the power of business credit. The fact is creditworthy businesses have a much greater credit capacity compared to a business owner that relies on personal credit alone.

The Small Business Administration can be a valuable resource for information pertaining to owning and operating a small business.

When starting any business, we recommend that you protect your investment by seeking advice from a qualified tax or legal professional.