7 Tips for Building Good Credit for a Small Business

Small business credit and personal credit are often the same thing in the early days of a business. As the business grows and matures, these two credit entities should diverge. Ideally, the personal credit of the owner should become unimportant to the credit worthiness of the business. No one checks the shareholders credit score for large companies. If the business has its own tax identification, address, and is incorporated, it should be able to stand or fall on its own credit rating. Getting to this point is another matter.

Learn not to mingle personal and business funds.

The first step to establishing credit is to build a paper trail of the income and expenses of the company. This means that separate accounts must be established for checking and possibly savings. Money that comes into the business must be treated as if it belongs to someone else for accounting purposes. This will provide potential lenders with a way to judge the profitability of the business. By not adding personal funds to the business to keep it floating, the owner will also be able to know whether the business is actually making money.

Resist the urge to take extra cash from the business for personal whims.

Owners of small businesses must learn to pay themselves a reasonable salary and resist the temptation to take extra cash from the business. When a business applies for credit, the lender will look for a consistent positive cash flow. When the owner's lifestyle is an obvious drag on the company's profitability, lenders are not going to be willing to loan to the business without the owner having to assume some personal risk. On the other hand, a business with a strong cash flow and a steady gain in funds available will be viewed as a good risk.

Keep good records.

Many small business owners become so busy running the shop that they neglect the bookkeeping. It is hard to convince others that you deserve credit if they cannot tell what is going on financially. You need to be able to provide a decent statement of income and expenses along with a balance sheet. Over time, these accumulated records along with your banking history will grow. These documents can then provide lenders with a good picture of how your business is doing financially.

Establish accounts with local vendors.

Most local businesses are willing to extend at least limited credit to new customers. As you purchase items and pay on time, these credit limits can be increased. These should become accounts that grow all month with the balances paid in full by the due date. It is not exactly the same as establishing a long-term loan, but it will go far toward proving that you and your company are able to pay your bills. Often, these companies will not report to credit bureaus, but they will give a credit reference that will help with future borrowing.

Get a company credit card without your name on the front.

The credit card issuer may list you as a primary contact, but the company will be the card owner. In this way, your credit history with the card company will be reported to credit bureaus. The company will begin establishing another way of proving its ability to responsibly handle credit. Keep these balances relatively small and pay them off as often as possible.

Buy some land for future growth.

Compared to buildings, land is generally cheaper and more secure. If you choose a good location, the property should grow in value. It will not require a huge sum of money to purchase it. The lender will know that it is a secure risk for them as long as you can offer a significant down payment. It should be at least 20 to 30 percent. Even if you can afford to pay cash, it is a good idea to finance a portion to continue to build the company's credit.

Keep a good cash balance.

Banks and other lenders like cash. Having enough cash on hand to cover several months of operating costs tells the bank that the company does not have impending money woes. While the business may not always have a large cash balance, try to keep it as big as possible without stunting the growth of the company.