Have you ever felt like missing the mark by just a bullet? You have the pitch ready, you have one of the best business plans, but you could not redevelop the product due to a cash shortage. You approach online for the best loans, but get rejected. Why? It is because you lack the right credit score. Eventually, you end up losing one of the biggest investors for your startup. It is a general scenario, but a painful one. Having that investor on the board could have benefited your business.
Anyways, regretting would not do any good. Instead, building credit may. The blog lists how to build a business credit score from scratch without stress. It is ideal for any new business owner seeking to put their best foot forward in the market.
Steps to build a business credit score from scratch
A business credit is the company’s track record of financial reputation. It showcases how you use lines of credit for different company requirements. Individual owners with balanced financial management are generally considered responsible borrowers.
Payment history is one of the most important things that defines your business credit score. Having a good mix of credit with timely payments reveals a good credit score. Alternatively, businesses with too many pending payments, low operating history and no business registration have no or poor credit history. It affects the chances of getting the loans. Here is how to build your business credit score from scratch.
Step 1- Separate business from personal finances
Personal credit defines an individual’s financial profile and is based on factors like loan repayment history, credit usage, income, debts, etc. However, business credit is tied to the company’s financial progress. It defines revenue, debts, trading history, profit, and loss, etc. You cannot use a business credit for your personal goals. However, keeping both credit scores in good shape is required to get instant approval for loans.
Step 2- set business bank account
Once you understand the clear difference between personal and business expenses, open a separate business bank account. You might have used your personal bank account for the initial stage expenses. However, once you step in professionally, you must have a separate account. Check for the facilities like accounting and payroll software with the bank account.
Step 3- consider a business credit card
Yes, you may apply for a business credit card to build your credit score. Check for the best offers on business credit cards. You can check on the introductory range and grab the one with the most discounts. Use it for your heavy business purchases and payments responsibly. Repaying the credit card timely boosts your credit score. You can also check the potential for cashback on some purchases. It may prove budget savvy for your business needs. However, missing credit card payments may affect your credit score drastically.
Step 4 – Pay bills on time
Set reminders to pay the bills timely and avoid the backlog. You can also check for the direct debit facilities. It helps you repay the dues automatically on the due date. Businesses with a bank account with direct debit facilities can use the option. It cuts the hassle of setting reminders and helps you be on top of payments. The better your financial profile, the higher your credit score. Here is how you can ease up the process:
- Maintain a calendar of the due date or payment reminders
- Sort the bill by priority and importance
- Set up automated payments for fixed or predictable bills
- Use a centralised software or maintain an Excel sheet to track payments
- Keep a cash buffer for other unplanned expenses
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Step 5- Establish positive trade line
Trade lines are a critical aspect for any business owner. It lists the comprehensive history of the trades you have with your customers, suppliers, etc. Thus, establishing accounts with vendors and credit agencies is important.
Vendors send your financial profile to credit agencies to verify your company and know financial handling. Based on that, credit agencies calculate or determine your credit score. Establishing a positive credit line or clearing your dues/payments on time helps your credit score.
Step 6- File accounts and taxes timely
Identify and ensure you have updated accounts and tax files. Check the tax filing dates and file one before the last date. Missing the deadline could lead to penalties and fines, which may affect your credit score. So, if building one from scratch, try everything to avoid skipping the tax payments.
Apart from the business credit score and payments, check your backlog too. It may also directly affect your credit rating or financial reliability. Apart from that, some credit scoring models reward businesses with a consistent payment schedule. It may prove to be a win-win situation for your finances and credit score.
Step 7- Apply for credit only if you must
Individual business owners must understand that taking over recurring credit lines unecessarily does not do good to their credit scores. It only affects your capacity to qualify for better loans and interest rates. Instead, practice financial discipline by borrowing money only when you need to. Prioritise needs over wants while taking on a loan.
For example, if you must shift the payroll structure a little, define the loopholes first. Check ways to tackle that only instead of changing the whole thing. For example, you can invest in an automatic payroll software that helps you save time. You can input the data that you already have; don’t go for separate software or a tool. It will sort things out for you in minutes. If short on cash, check a working capital loan for new businesses online. You may benefit from this, as this automation grants you enough time to concentrate on other tasks. Identify and borrow only the amount that you struggle to bridge.
Step 8- check your credit score changes
Lastly, you must follow the above strategies and track the shift in your credit score. Identify how paying a particular bill or taking a credit affects your credit rating. Monitor your credit score by requesting an updated credit report twice a month. You can check both personal and business ones for a better overview. Check for the delinquencies, errors and unpaid debts. Report the errors to credit agencies and request an updated report.
Bottom line
These are some strategies that may help you with credit score improvement. If searching for how to build a credit score from scratch as a business owner, follow each step. Keep your business and personal credit scores and bank accounts separate. Use the credit facilities responsibly and repay the dues timely. Take on a credit builder or personal loan to build your credit score quickly.