As a small business owner, you need to know all about about your most important resource: access to capital.
Without a solid business credit score, gaining access to capital can be both tough and expensive. When combined with factors like your business’ success and profitability, good business credit will make you an attractive borrower to long-term lenders, meaning easier access to credit and better terms for you
In order to get there, you need to prove to lenders that you can borrow funds and repay them responsibly. Where do you start?
A business credit card can come in handy here. A business credit card is a great way to give yourself a little bit of flexibility when it comes to everyday spending on your business. It’s also one of the simplest ways to start building your business credit. (For 6 more ways to build business credit, read this.)
Here are four ways a business credit card can help improve your business credit score.
1. Apply for a business credit card, even if you don’t think you need one yet.
Your business credit history is an important factor that determines your business credit score. It’s also one where you have very little control. You can’t go back in time and apply for business credit earlier on in your business history. You can only start establishing your credit history once you apply for credit—beyond that, there’s nothing you can do but wait.
Banks and other traditional lenders tend not to approve business loans for business owners until they’ve been in business for a few years. When you get to a point when you’ll potentially want a long-term loan, it’s vital that you have a proven history of credibility.
That’s where a business credit card comes in. There are many options available even for business owners who are just starting out. If you don’t yet have a lot of expenses, consider opening a no-fee or low-fee card with a low credit limit.
2. Establish a solid payment history separate from your personal expenses.
One of the biggest factors in determining your business credit score is your payment history. Building a solid history of making your credit payments on time tells lenders that they can trust you, and that you are a low-risk investment. If you use your credit responsibly and pay it back on time, you’ll be on your way to larger credit limits and a better score.
A simple way to establish a positive payment history is to use your business credit card for everyday business purchases. There are plenty of expenses that you can’t avoid as a business owner—by putting these inevitable expenses on credit, you’ll kill two birds with one stone.
As a bonus, a business credit card makes it much easier to keep your business and personal expenses and credit scores separate. Having all your business expenses in one place will save you some headaches during tax season.
Before you start paying for all your everyday business purchases with your business card, make sure you can pay the balance off in full each month. While you only need to make minimum payments to build up your payment history, staying out of debt in the early days is one of the most responsible things you can do as a small business owner.
3. Use a secured business credit card if you have no credit history.
There are many different business credit cards out there, but if you have a low credit score (including personal credit), your options are more limited. A secured business credit card is a safe bet for new business owners with no credit or low credit.
If you have no or low credit, lenders are less willing to let you borrow without putting something up as collateral. That’s where secured cards come in: they function the same as a regular credit card, but when you open the account, you put down a security deposit (typically equal to your credit limit). The bank will hold your security deposit in case you default on your payments—it’s not used to pay off your debt as you go, but rather acts as a backup plan. If you decide to close your account, you’ll get your deposit back.
Since the lender isn’t taking on any risk when you open a secured credit card account, thanks to the security deposit, it’s easier to qualify for a secured business credit card. You can use the secured card for everyday business purchases. To build your credit, make sure you pay it off on time and in full. If you do, you’ll improve your business credit, since your payment history is such an important part in your business credit score.
Keeping your credit utilization rate low tells lenders that you are a responsible borrower. Your goal should be to aim to keep your credit utilization ratio to 30%, or less.
4. Keep your credit utilization low.
Another huge factor in calculating your business credit score is your credit utilization rate. This is the percentage of your total available business credit that you’ve currently used. For example, if you have one business credit line with a limit of $1,000, and you currently have a balance of $500, your credit utilization rate is 50%.
Keeping your credit utilization rate low tells lenders that you are a responsible borrower—you don’t spend more than you can afford to pay back. Your goal should be to aim to keep your credit utilization ratio to 30%, or less. That means that, at any given time, you should have more credit available to you than the credit balance you owe.
If you have a business credit card and are having trouble staying under the desired credit utilization rate, try calling your lender and having your credit limit raised. If you have a history of paying off your balance on time, this is a definite possibility. Continue keeping your expenses low to keep your credit utilization rate under 30%.
Building business credit takes time, especially for new business owners without any credit history to begin with. By obtaining a business credit card early, using it for small purchases, and making your payments on time, you can build that credit history and open many doors for your business in the future.
