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How to Build and Establish a Better Business Credit Score

Let's look at what business credit is, why it's important, and how you can establish and build it.

Establishing a strong business credit reputation is one of the most crucial components of the early stages of running a small business in Ontario. Furthermore, having good company credit will make it easier for you to obtain funding and manage business risk and cash flow.

Building a good business credit score, on the other hand, is more difficult than you might imagine, particularly for fledgling enterprises. That’s why using your personal credit for business purposes can be appealing.

This will not help you establish business credit though and high credit use for company costs can potentially damage your personal credit as well.

Let’s look at what business credit is, why it’s important, and how you can establish and build it.

What is the definition of business credit?

Your business has a credit score, similar to your personal credit score. It is designed to demonstrate the financial health of your business and its reputation with creditors. This score is used by other businesses, investors, and financial institutions to assess your company’s financial credibility and the likelihood of you repaying borrowed funds.

Equifax and TransUnion are Canada’s two major credit bureaus. Your business credit is calculated by them according to their algorithms, which, although far from perfect, constitute the accepted norm. The calculating technique varies at each agency, but it normally produces a business credit score that ranges from 0 to 100. Aiming for a score of 80 or above is ideal, but that will take time.

Why should I be concerned about my company’s credit score?

Having a good business credit score can help you grow your business faster and more efficiently. Lenders use your company credit to establish your creditworthiness and set loan terms when you apply for a loan. Vendors also make use of it if you apply for equipment financing, or are hoping to lease business premises.

It’s crucial to remember that your company credit score can be viewed by anyone. As a result, you must develop a good company credit score as quickly as possible to get better loan terms and interest rates, more favorable business insurance rates, and make larger vendor purchases.

Separating your business credit from your personal credit will benefit you greatly in the long term as a small business owner. With a separate tax number, your business credit is linked only to your business organization. It has nothing to do with your identity or personal finances. That can be a very good thing as if your business fails, your personal credit will not be harmed in any way.

Unsure how to go about building a better business credit score fast? Here are some suggestions

Make Your Business Official

Are you open for business? That’s fantastic! But you need to move out of the early start-up stage as quickly as you can and move your business on from being an enthusiastic home-based concern to a real business, figurately if not literally.

That’s because you won’t be able to build business credit until your company is fully operational as a business entity from a legal standpoint. This entails things like obtaining a business phone number and registering it in your local phone directory (and with Google of course) and getting a business number from the CRA.

A website and a bank account in your legal business name are also a must. Once established this bank account should become the account you’ll use to pay your business bills on a regular basis and you should stop using any personal accounts for business reasons.

Build Positive Vendor and Supplier Connections

Once you enter the world of small business, you will quickly understand how beneficial it is to have a good relationship with industry vendors or suppliers. That is, the better your relationship, the more likely you are to avoid paying for goods or services in advance.

When vendors or suppliers record your payments to credit agencies based on your line of credit or net-30 payment, you can actually build an excellent credit history. Ensure that you open accounts with merchants and suppliers who DO report to credit bureaus (some do not).

Pay Your Bills On Time

This is the most crucial stage in every credit application and one of the fastest and most effective ways to build your business credit score. Paying your invoices on time demonstrates to lenders that you are dependable and capable of managing your debt appropriately. Late payments can lower your credit score and have a bad impact on your business’s overall reputation.

Form a Corporation

Get incorporated if you haven’t already. The major reason for this is to keep your personal and corporate credit histories distinct and unconnected legally. There are numerous advantages to incorporating, including faster access to capital, lower tax rates, restricted liability, and so on.

Apply for a Business Credit Card

Opening a business credit card with an institution that reports to one or more of Canada’s main credit bureaus is a good idea. One credit card is sufficient, but having more can be really beneficial.

But be careful not to abuse your credit card and try to keep its usage under 30% of its limit, as credit usage is another way credit bureaus calculate your score, and being overstretched – as in your credit cards are right at their limit – will have a negative impact.

Monitor Your Business Credit Report

Regularly review your business credit report. Many small business owners have discovered major inaccuracies in their reports. You can pick up on problems sooner rather than later by closely monitoring these reports and taking action to resolve them. You must file a dispute with one of the main credit reporting companies if you notice an inaccuracy and this can take quite a while to resolve, so the faster you start the process, the better.

Work with an Accountant

There are lots of reasons why small businesses benefit from working with an accountant from the start, and helping you ensure you develop the financial good habits you should to build a better business credit score fast is just one of them. Contact us today to learn more about how we can help you.