Building business credit
Yesterday, we talked about getting your personal finances in order before attempting to start your landscaping business. Now comes the bigger question: Do I have good enough credit to start my own company?
According to NerdWallet, the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia say that 45 percent of small-business loan borrowers who are told no by creditors are turned down because of their credit scores. Bad credit causes you to have higher interest rates, less favorable payment terms with suppliers and higher insurance premiums.
Personal credit reports are private, but anyone is able to publicly view your business credit report. Having a strong business credit profile helps you to secure a loan and also attract new business in the future. While it’s not impossible to get a small business loan with bad personal credit, NerdWallet suggests a few starter tips you can implement to help build your business credit, qualify for lower interest rates and cut the total cost of your loan.
Current information. The first tip NerdWallet suggests is keeping your business information current with all three credit bureaus, as business scores are much less streamlined than personal ones.
Each business credit bureau will have a different formula for calculating scores, and different lenders will report different types of data. You can’t be sure what credit bureau your vendors, potential customers or creditors will be checking, so it’s best to stay updated info on all fronts. The more complete your profile is, the better.
To find out more about NerdWallet’s business credit score guide, click here.
Trade lines and payments. The second recommendation from NerdWallet is to establish trade lines with your suppliers.
If your landscaping company is purchasing materials and other supplies from a third-party vendor, those purchases could help you build up your business credit.
Some suppliers will extend trade credit, which allows you to pay several days or weeks after you’ve gotten the inventory. If you’re in this situation, request that your supplier report your payments to a business credit bureau. As long as you stick to the terms of the trade agreement, your credit score should see a boost.
As previously discussed in the personal finances section, paying bills early or on time can help put you in a good light with creditors. NerdWallet says a long credit history has a good chance of weighing favorably, and the sooner you can begin establishing business credit, the better.
Credit utilization is also a factor when it comes to business credit scores, so using lines of credit or credit cards can sometimes prove helpful. But, just like with personal finances and spending, do not overdo it. NerdWallet recommends never spending more than 20-30 percent of your credit limit.
Borrowing and public records. If you’re able to make all of your payments on time and your lender reports to a credit bureau, small-business loans can help boost your business credit; the catch is that not all lenders do report to a credit bureau.
If your goal is to build up business credit this way, talk to your lender ahead of time and ask them upfront if they will report to a business credit bureau before taking out a loan with them.
For those with weak or bad credit, banks will typically not loan to you, but there are many online small-business lenders willing to lend to those with poor or bad credit, and many of them report to business credit bureaus.
The last bit of advice NerdWallet offers is to keep your public records clean. Along with your business’s creditor payment history, your business credit report will also include any public records associated with your business name, such as liens (a creditor’s legal right to seize your property unless you pay what’s owed), court rulings or bankruptcies.
Having negative marks like this on your record can last anywhere from seven to 10 years depending on the violation, which can cost you customers, investors and more.