Having good business credit is one of the most important requirements for small business financing. If you are currently in the process of expanding your bakery business, building good business credit early will help you get capital at better terms and rates that are difficult for most new borrowers.
What is business credit?
A business credit or business credit score is a rating that reflects the credit quality of a business. Lenders typically use this to decide whether to extend credit to a business and what interest rate to decide.
Like a personal credit score, your business credit score is a numerical representation of 0 to 100. Most lenders require a minimum business credit score of 75; of course, the higher your score, the better your chances of getting funding.
To determine your business credit score, you need to ask credit reporting agencies like Experian, Equifax, and Dun & Bradstreet. These agencies will release your full business credit report, which includes your payment history, since you obtained your federal tax identification number. Compared to a personal credit report, a business credit report can be reviewed by the general public.
What is your business credit score?
A company’s credit score is a number that indicates the credit quality of a business. This score is used by lenders to determine whether to extend credit to a business. The higher the score, the more likely it is that a business will accept credit.
There are several factors that determine a business’s credit score.
- Payment history. Lenders will look at how many times the business has made payments in the past. They will also examine public records to see if there has been any failure or execution.
- The amount of debt the company owes. The more debt a business owes, the greater the risk of default. Lenders will also look at business credit limits to see how much debt they can actually handle.
- Persistence in business operations. The longer you stay in business, the better your credit score. This is because lenders believe that companies that have been around for a long time will be able to make payments on time and move forward financially.
Reasons to build good business credit early
It’s important to know that your business credit score is more than indicative of your ability to pay bills and debts on time. It is really an important reference to determine the financial health and reliability of your business. Therefore, when you build your business credit score early on, you can show lenders that you are worthy of credit when it is time to expand your bakery to provide capital.
Here are some other reasons why building a good business credit score early will go a long way in your bakery business:
Set a significant credit history early.
Small businesses are often distressed by borrowing money from traditional lenders such as banks because they do not have enough time in the business to establish a significant credit history. So if you plan to increase it soon, make sure you start generating your credit now. The earlier you record your transactions, the longer your credit history will be.
When you need to borrow money at the beginning of your business.
Most lenders would require you to be in the company for at least three years to be eligible for financing. In that case, building the right business credit early can help you get the funds you need much faster.
Be in a better position to negotiate agreements.
Building good business credit gives you the ability to negotiate better deals with suppliers. This is because suppliers want to maintain relationships with customers with a clean business credit report.
Save more money.
When you have good business credit to show lenders, you can get better terms and rates. You may also receive a variety of financing, such as revolving lines of credit or equipment financing.
Having good business credit tells lenders that you are able to pay off your debts in full and on time. It also determines how high your risk may be. It will be used to calculate your rates and the types of small business financing you can get, and how much you will be entitled to.
Tips for Creating Good Business Credit
There are a number of things you can do to build your business credit score. One is to make sure your bills are always paid on time. This shows lenders that you are a responsible lender and can help you improve your payment history.
Another way to build your business credit score is to use a business credit card responsibly. This means making timely payments and keeping your balance low. Using a business credit card can help diversify your credit mix, which is another factor in calculating your business credit score.
Lastly, keep your debt and income ratio low. This means that you do not have to borrow more money than you have to pay. Lenders will review this ratio to determine if you are a good candidate for a loan.
It is never too early to start building your business credit score. A strong business credit score will help you accept loans and lines of credit to help you finance the growth of your bakery.
About the author
Matthew Gillman is a business finance expert on commercial lending with over a decade of experience. He is the founder and CEO of SMB Compass, a specialist financial company that offers educational and financing opportunities to business owners.