When your small business is ready to grow, deciding how to finance your planned changes is one of the first steps you’ll need to take. If you can show promising business credit and provide credit history, you’ll have an easier time getting approved for loans and qualifying for lower rates and better terms.
Why is Credit History Important?
Lenders are businesses too, and they only stay open if they’re paid back. This is why it’s important for you to demonstrate that they can trust you as a borrower. Credit history shows a lender that they can expect you to make your payments on your loan. As much as they may like to take you at your word, they’re going to need numbers.
First Step for Sole Proprietors: Separate Your Business Credit from Your Personal Credit
If you’re a sole proprietor, you and your business are one and the same legally. If you register your business as an LLC, LLP, or corporation, it becomes its own entity separate from you, and its credit becomes separate from your personal credit.
If you plan on growing your small business, consider taking this step now. Visit the U.S. Small Business Administration to learn which type of entity is right for your business as it grows.
Start Building Credit History with a DUNS Number
Before you begin building business credit, you need to make sure your credit activities will be counted. Register for a Dun & Bradstreet number (DUNS number) to get started.
A DUNS number is not the same as an EIN. An EIN is a tax identification issued by the IRS. DUNS numbers are used to track business credit, not income. They’re not required, so many startups and small businesses don’t register for one. But taking this extra step in the beginning will save you time and effort in the long run.
Start Small and Pay Your Bills
Not many small business owners know this, but lenders come in levels you navigate through. Much like when you’re building a network of business relationships, you start small and work your way up.
Start with a business credit card with a low limit. Use it for small amounts, and pay your bill on time. Every paid bill is a step up the business credit ladder. A late or unpaid bill on your credit history takes a very long time to recover from, so don’t rush into swiping your card. At first, use it for a few everyday things you buy anyway instead of large purchases. This will help you stay within your budget.
Important note: Predatory lenders make money by giving small business owners with poor or nonexistent credit high limits and interest rates they can’t afford to pay off. Don’t apply for your business credit card from an ad you receive in the mail, in your email, or on social media just because it makes big promises and sounds true.
Graduate to Microlenders and CDFIs
Since lenders come in levels, the first few years of a business’s life are spent in lower levels. The next step after your business credit card is a microloan. Microloans can go as high as $50,000 but are typically around $10-13,000.
Community Development Financial Institutions (CDFIs) are also an option. These organizations are supported by the federal government’s CDFI Fund. Because their mission is community building, CDFIs encourage businesses in low-income and undercapitalized communities to apply for financing.
Once your business is big enough, you move on to Small Business Investment Companies (SBICs), which are a step below large banks.
Building business credit history and accessing the capital your small business needs to expand is a long game. It doesn’t happen quickly, and small setbacks have a long-lasting effect. Take the first steps as soon as you can to give your business a strong foundation for the future.