How to Establish Credit for Your Small Business

These tips can help you navigate business credit for your startup.

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Knowing how to establish credit for your small business can be tricky. The good news is that there are several ways to establish credit that can set your business up for success. 

Read on for expert advice on the topic.

Understand Your Personal Credit

One of the first steps to getting a business credit line is to look at your personal credit score. "Sometimes folks are surprised when their personal credit is attached to a business loan," says Susie Leinbaugh, a senior vice president at Chase Business Banking in Dallas, TX. "Maintaining good personal credit is really, really important, particularly for a startup."

Chris Runyan, owner of six Game X Change stores in Connecticut, agrees. "They'll lean on your personal credit," he says. "I have personal guarantees on my loans anyway. In the company name, I borrow money, but it's me. It's my personal guarantee."

Problem spots on your credit? Work to get them fixed as quickly as possible, says Craig Street, Small Business Administration lending director for Columbus, OH-based Huntington Bancshares, an SBA lender. "If it is a delinquency, then it must get resolved. Unresolved, open issues are the biggest killer of credit."

Open a Credit Card & Pay on Time

A credit card is not only convenient; having one in your business's name is another way to establish a credit history.

Kenneth Metzger, co-owner of Oak City Cycling Project, an independent cycling shop in Raleigh, NC, started small with a $1,000 credit limit. In order to stock the inventory he needed, he had to max out and pay off the balance multiple times a month. The prompt payments paid off, and now Oak City has a $10,000 credit limit, an easy extension for the bank given the company's payment history.

While having a business credit card is helpful, Street cautions owners against opening multiple accounts in an attempt to establish a credit record. "I would suggest a credit card for a business for its utility," he says. "Properly used, it's a great tool but improperly used, you can get into trouble. Borrow prudently and pay on time — that's the best way to build credit."

Maintain Good Credit

The Small Business Administration recommends periodically monitoring your business's credit to stay on top of and resolve potential problems. This helps keep your business credit score healthy, and a good record helps you get the best terms for bank loans and other financing. It can also give you favorable rates with vendors, ensuring you have the inventory and supplies needed to run your business with affordable terms.

"Credit offers flexibility," Metzger says. "If you have a slow month, you're still able to keep the inventory you need. If cash flow is low, you're still OK for a bit, which is especially important in a seasonal business like ours."

Action Items for How to Establish Credit

To summarize, these four actions are great ways to establish credit for your small business.

1. Know your personal credit score and clean up any problems to show lenders you're a good risk.

2. Open a credit card and other accounts in your business's name to create a track record of payment. Be sure to pay on time.

3. Build trust with vendors by paying promptly. This is important, because other vendors and lenders ask for recommendations when extending credit.

4. Check your credit scores periodically to identify and correct any problems to eliminate roadblocks when you need additional financing.

Establishing good credit from the beginning gives your business a solid foundation that makes it easier to obtain financing at various stages. Much like personal credit, it only takes a few uncorrected mistakes to derail your business credit. While it might seem obvious, making timely payments on bills and credit cards is one of the easiest ways to establish credit and help lenders say yes.