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Like large enterprises, small businesses also have option to choose from a variety of financing options provided by banks and non-banking financial companies (NBFCs). But several studies suggest that small business owners often find it daunting to avail credit to meet working capital needs or improve cash flow situation. The lenders reject small business loans applications for a number of reasons – low credit score, bad credit history, weak cash flow and lack of collateral.
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Like large enterprises, small businesses also have option to choose from a variety of financing options provided by banks and non banking financial companies (NBFCs). But several studies suggest that small business owners often find it daunting to avail credit to meet working capital needs or improve cash flow situation. The lenders reject small business loans applications for a number of reasons – low credit score, bad credit history, weak cash flow and lack of collateral.
As a small business owner, you can easily enhance your future borrowing potentials by building business credit. The lenders will use your business credit as the key criterion to understand your payment habits and assess your creditworthiness. However, you must remember that business credit building in a continuous process. You must understand all aspects of how to build business credit for small businesses to meet both short-term and long-term financial needs of your small business without paying hefty interest.
4Ways to Build Business Credit for Small Businesses 1)Your Personal and Business Identities Separated You can easily establish business credit by providing a distinct identity to your small business. It is always a good idea to get your business registered as a limited liability company (LLC). The incorporation will provide a unique identity to the business. Also, it will keep the business credit history separated from your personal credit history. The separation will make it easier for you to eliminate the impact of any wrong financial decision on your business credit history.
2)Open a Business Bank Account In addition to providing a distinct identity to your small business, it is also important open a business bank account or current account in its name. After opening the business bank account, you must use it for all financial transactions. You can ask your customers or clients to transfer payments directly to the business account. Likewise, you must make payment to the suppliers and creditors from the business bank account directly.
3)Apply for Credit Early You must apply for any form of credit from the bank after operating the business bank account for some months. Most banks will hesitate to extend credit facility based on a new business bank account. But you can still apply for a credit line, business credit card, or overdraft facility. But there are a number of NBFCs that provide small credit lines and unsecured business loans to new businesses and start-ups. You can easily create a good credit history of the business by repaying the loans on time.
4)Establish Financial Relationship with Multiple Vendors You must remember the financial institutions change lending policies and revise interest rates from time to time. When you forge relationship with a single lender, it will become difficult to keep the credit line or overdraft facility open. You must forge financial relationship with multiple lenders to keep the credit line intact and build business credit. For instance, if you are opening the business bank account with a particular bank, it is a good idea to obtain the business credit card from a different financial institution.
