A Credit Crash Course for Small Businesses

No matter how well funded a small business may be, the ability to establish and maintain a strong credit rating is fundamental for achieving growth and success, let alone survival during difficult times. Being that many new business owners fail to recognize and take full advantage of the value of credit, here's a crash course on how to obtain and leverage business credit more effectively.

Establishing good credit starts now: A common misconception with many business owners is that establishing credit just sort of happens as a natural result of doing business. The reality is that creating a creditworthy business takes a proactive approach, and the sooner the process begins the better. The best place to start is with personal credit, making sure that one's own finances are in order. Should the need for financial aid arise before solid business credit is established, having a strong personal credit rating will improve your chances of obtaining a small business loan. A good way to begin the establishment of business credit is to purchase a vehicle using personal credit and make the monthly payments through the business.

Keep your business autonomous: Once you've leveraged your personal credit, the next crucial step is to do everything you possibly can to establish your business as a separate entity, functioning with no direct ties to your personal finances. While incorporating is the best option, small business owners can reap the same benefits by forming a less costly LLC. You should also register your business with the major credit bureaus such as Dun & Bradstreet and make an online request for a D-U-N-S number which will further set your business apart and be utilized for the purposes of proper credit identification.

At the very least, if you run a home based business and are unable to incorporate, make sure you establish a business-only bank account. You'll also want to obtain a phone line designated solely for your business and use that line consistently. It's a simple procedure but it will help to make your business more credible in the eyes of prospective lenders, potentially shortening the waiting time for securing a business credit card, another powerful tool that can help to clearly differentiate your business.

Keep track of your profile: Once the credit building process begins it's essential to monitor the status of your credit profile on a regular basis. Never assume that your good business dealings with a particular company are being reported frequently and accurately. The fact of the matter is that some companies are slow when it comes to reporting. Before conducting business with a particular company it's best to ask about their credit reporting policy in order to make sure that all of your transactions count on your credit profile.

Work to establish lines of credit: Regardless of your cash flow it's always a good practice to establish a positive rapport with your vendors early on and then ask them to extend you a small line of credit that you are confident you can pay off on time. Not only will this help build your credit, it could also result in better terms and interest rates for the products and services you rely on to do business. When buying office supplies and equipment, instead of writing checks or pulling out the corporate plastic at the big box mega-store, patronize companies like Staples and Office Depot that make it a practice to offer modest credit lines to small businesses.

Keep your debt ratio reasonable: Once you've obtained a certain amount of business credit, avoid the urge to borrow more money than you absolutely need. While borrowing is warranted for seizing concrete opportunities for growth and expansion, incurring unnecessary debt can make you a credit risk in the eyes of future lenders. Although new business owners may be able to obtain secured business lines of credit with certain lending institutions, extreme caution should be exercised due to the fact that secured loans require collateral, namely business assets.

Always pay on time: Although this smacks of basic business 101, the power of consistently paying creditors on time cannot be overemphasized. No other business practice can do more to create a positive credit rating and increase your chances of obtaining small business loans and lines of credit than paying your bills in a timely manner. Also, being that the foundation of a successful business is based on forming relationships of mutual trust, a good reputation among creditors can be an extremely valuable asset.

About the Author: Jason Robbins is a freelance writer who specializes in personal credit. Robbins has written various pieces about credit repair and what to look for when checking out credit repair companies.