What is the state of your business credit?
African American business owners should take their credit reputation seriously. Especially if we want to create a thriving business that can survive the most difficult of times.
A study released in 2020 by the Federal Reserve Bank of Atlanta reveals that 52% of Black business owners relied on their personal credit scores to get financing. One can assume that it’s because the credit standing of their business isn’t good enough to get the financial aid that they need.
If you can relate to that, then you need to pay attention to this article.
The importance of business credit
Business credit is a type of financial tool. Use it to qualify for loans or other financing products. As long as your business has a good credit score, it’s easier to get the financing you need to take your business to the next level.
Not only that, this tool can help you build partnerships. Whether it’s with vendors or B2B (business-to-business) sellers, your credit score helps build your credibility. It sets a foundation for building strong relationships.
When you need to negotiate prices and services rendered, you can also use your business credit as leverage.
As you can see, taking care of the credit reputation of your business opens several opportunities. If you can maintain a good credit standing, it indicates a healthy financial situation. It also proves that your business is reliable.
Now the challenge is, how can you build a great credit reputation for your business?
3 steps to build your business credit
To build your business credit, you need to establish a credit-worthy business first. That means setting up your business, so you’ll be approved a credit line or loan.
How do you do that? There are three simple steps for you to follow.
Step 1: Structure your business as a legal entity
Start by establishing your business as a proper legal entity. There are several types of business structures to choose from:
- A Sole Proprietorship is the simplest form when it comes to business structures. This means only one person is responsible for the company – whether that’s profit or debts.
- A Partnership is a business that is owned by two or more people. This has two types. One is a general partnership where everyone involved has equal rights to the business. The second is limited partnership wherein one partner has more control over the operations than the other.
- A Limited Liability Company is a hybrid type of business structure. Owners are able to limit their personal liabilities while enjoying the benefits one can get from a partnership structure.
- A Corporation is when the business is completely separate from the owners. That means the personal assets of the owners are shielded in case the business comes under fire. This type of structure has several types under it: C corporation, S corporation, B corporation, closed corporation, open corporation, and nonprofit corporation.
- A Cooperative is owned by the very people that it was created to serve – hence the term user owners.
Make sure you consult a lawyer to help you determine the best type of structure for your business. Get in touch with a tax attorney. Or you can get in touch with us at the African American Chamber of Commerce so we can help you.
Step 2: Get your EIN (Employer Identification Number)
Your EIN is will be used for tax administration purposes. This is a requirement if you want to open a business bank account. The same is true if you plan on applying for financing.
You can get your EIN through www.irs.gov. This should be free so you don’t have to worry about paying for anything.
Once you have your EIN, you can proceed to open a bank account. Never use your personal account and mix it with your business finances. You’ll understand why when tax season comes. If you have a separate business account, you can fully benefit from business deductions and credits.
This will also ensure that any credit mistakes that you will personally make won’t reflect on your business credit.
Step 3: Secure your DUNS Number
This is a number issued by Dun & Bradstreet. It is used by various lenders and even business partners to predict the financial stability of your company. They can determine if they can rely on you. It’ll help them decide if they should grant you a loan to help establish your business.
This DUNS number is even a requirement by the federal government and some municipalities – in the event that you want to get government contracts.
Tips to build your business credit
Once your business is in a position to use credit, you can now start using it. Remember that the goal here is not just to have a business credit – but to have a good one.
So what can you do to maintain a good credit reputation for your business?
Here are tips you can use.
- Use your business credit card. This is actually the easiest way to keep using credit without having to apply for it again and again. Just make sure that you control how the credit card is used. The same rules apply with a personal credit card. Keep the balance low. Pay it in full once the billing statement comes. This can easily be abused so be careful and track your credit expenses.
- Build relationships with your suppliers. Every time you purchase something or avail of a service, pay your suppliers on time. It’s even better if you can pay early. There are suppliers who also send reports to credit agencies. If they report that you’re not paying, that can pull your business credit down.
- Keep an eye on your credit utilization. The ideal credit utilization rate is 30%. That means your credit balance should never be more than 30% of our overall credit limit. If you feel like you’re going beyond 30%, pay your current balance first. Then you can continue borrowing.
- Monitor your credit report. Make sure your business will never suffer from fraud. Keep your data secure but at the same time, monitor the credit report of your business. Check that all entries are authorized. If not, report it or file a dispute.
African American business owners can easily build their business credit. But increasing it and maintaining a good credit reputation is another story. It’s very easy to bring the credit score of your business down. All it takes is one wrong credit move.
And the thing is, this is not something that you can improve overnight. Rebuilding your business credit will take time. So try to be diligent in how you use credit. Practice responsible financial habits and you’d be far from abusing your credit use.
If you want to know more about how to become a successful African-American business owner, join us. Here at the African American Chamber of Commerce of San Antonio, we provide various resources that’ll help our members build successful businesses.
We can do the same for you.