The statistics are sobering: Black entrepreneurs get denied for business loans twice as often as white entrepreneurs. Reasons may vary from one lender to another, but there’s one factor—regardless of race—that will absolutely impact your ability to secure financing.
Your credit scores.
Most business owners don’t realize they have business credit scores, just like they do personal scores. Your business is assessed on its risk level, based on credit history, debt to available credit ratio, and how long you’ve been in business. All of these factors contribute to scores given by business credit bureaus, the biggest being Dun & Bradstreet, Experian, and Equifax.
Many lenders look at your business credit as well as your personal credit to determine your ability to repay the loan. It’s important to understand how business credit works as well as ensure your scores are high enough to help you qualify for financing.
Do You Have Business Credit Scores?
Even though lenders can check your business credit, you might not actually have a credit history for your business, nor scores. That’s because only certain activities are reported to the business credit bureaus. These include:
- Tradelines with suppliers and vendors
- Business credit cards
- Business loans or lines of credit
If you find you don’t have business credit scores yet, not to worry. You can easily build your business credit with these tips.
1. Register Your Business
There are a few ways you can legitimize your business. The first is registering for an Employer Identification Number (EIN). This is like a Social Security number for your business and can be used when applying for loans and credit cards, as well as in filing your taxes.
Also, register for a D&B D-U-N-S number. This unique nine-digit identifier for a business was created by credit bureau Dun & Bradstreet and will help establish your business creditworthiness. It will also come in handy should you ever want to bid on government contracts.
2. Open Net-30 Tradelines
Tradelines are lines of credit you have with a vendor, and net-30 refers to the fact that you have 30 days after receiving an invoice to pay it. Having a few tradelines with companies you do business with (think: the office supply store you shop at regularly) can help build your credit because certain vendors (though not all) report your on-time payments to credit bureaus.
Using tradelines can keep cash flow more steady since you don’t have to pay for your purchase immediately. Just be sure to pay before the invoices are due!
3. Consider Changing Your Business Structure
If you haven’t registered your business as a corporation or an LLC, it is, by default, a sole proprietorship (or partnership). There are benefits to incorporating or forming an LLC: having a separate business entity provides a layer of protection between you and the business.
If, heaven forbid, your business is ever sued, as a sole proprietor, your personal assets could be seized to cover a judgment. A corporation can protect your personal assets.
It can also simplify your credit situation because, at a certain point, you don’t have to rely solely on personal credit to fund your business.
4. Separate Business and Personal Expenses
If you’re using your personal checking account or credit card to pay for business expenses, you’re far from alone, but understand that this practice can hurt your company. For one, it makes it more difficult to separate out those expenses, especially at tax time when you need to categorize expenses according to IRS guidelines.
Also having the two mixed means you probably aren’t building business credit. That could, should you decide to apply for a business loan down the line, make getting financing a challenge.
Have a separate checking account and credit cards only for business expenses.
Over time, if you make an effort with these credit-building strategies, you’ll establish your business’ credit and increase those scores. Then, if you decide to apply for financing, you’ll be well-positioned to get a great rate.
Jacque Morgan is currently vice president, general manager of Enterprise Partners at Nav, where she manages and enables strategic partnerships with financial institutions and industry players. Having owned several small businesses in the fitness and real estate industries, she is able to leverage her experience to provide value to entrepreneurs in the financial sector.