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According to a 2022 survey, business financing approval rates were considerably lower than pre-pandemic levels, with approval rates declining for the second consecutive year. 2023 has proven to be even more challenging to access venture capital funding, so it's important to build strong business credit to improve your eligibility.

Fortunately, there are several proactive steps that small business owners can take to help build business credit. In this article, we'll cover what you need to do to keep your credit strong.


Why building business credit is important

According to statistics from the Federal Reserve in 2022, nearly 40% of businesses that applied for financing in 2020 didn't get the funds they needed to grow. This is often due to insufficient or poor credit history, which can be a major roadblock for businesses seeking financing, no matter the amount.

Having strong business credit improves your chances of being approved for any financing, as lenders will want to know that you can repay them on time. Generally, lenders will require a credit score of at least 500 to approve you for a business loan. If you're applying through a bank, this requirement could be closer to 700.

Here's a full list of reasons why building business credit matters:‍

Easier access to capital

When potential investors such as venture capitalists and angel investors see that your business has good credit, they're far more likely to invest. A good credit rating will also open up other funding options, like traditional bank loans and lines of credit or alternative online lenders. This flexibility can be beneficial during uncertain economic times.

Improved cash flow and business reputation

Good credit will help you secure financing quickly and manage cash flow better, as it can give your business an influx of cash during economic downturns. This is especially important if your business has seasonal sales or needs to purchase inventory to meet growing customer demand.

When other businesses and investors see that your company has good credit, it can help you build credibility and trust. This can give your business a competitive edge in the marketplace and make customers more likely to do business with you.

Increased negotiating power

A good credit score can give you leverage when negotiating contracts and pricing. This can be especially helpful in industries where contracts are negotiated on an ongoing basis, such as professional services.

How to build business credit in 10 steps

You can establish business credit by formalizing your business structure, applying for an EIN number, and opening credit accounts that report to the business credit bureaus.

Once you've established credit for your business, you can work on building your score. Here's a full list of steps for establishing and building your business credit:

1. Formalize your business structure

The first step to establishing your business credit is to form a legal entity, such as an LLC or corporation. This separates your personal and business finances and gives you limited liability protection.

2. Apply for an Employer Identification Number (EIN)

An EIN is like a Social Security number for your business. Sole proprietors and single-member LLCs can also apply for an EIN on the IRS website if their business is in the United States. This number is used to identify your business when filing taxes and opening various accounts with lenders.

3. Open a business bank account

Opening a separate business bank account can also protect your personal finances from any legal or financial issues arising from your business. To open a business bank account, you'll have to provide your business's EIN, legal documents, and other information to verify your business's identity.

4. Establish credit with vendors and suppliers

Establishing credit with vendors and suppliers is one way to build your business's credit. Start by asking to be put on a net 30-day payment term instead of paying cash upfront. With a net 30-day payment term, you'll have 30 days to pay the bill after receiving an invoice. When you pay on time, you will demonstrate your financial responsibility and may increase your chances of being approved for more significant financing in the future.

5. Partner with vendors who report to major credit bureaus

Not all vendors and suppliers report to major business credit bureaus. There are a few credit bureaus that are known as the "major credit bureaus", and those are Dun & Bradstreet, Experian, and Equifax. It's important to research the vendors you're considering doing business with to make sure they report payment information to these bureaus so you can build business credit.

6. Make timely payments

Once you've established credit with vendors and suppliers, making timely payments is crucial to keep your credit score up. This will help build a strong payment history, which is one of the most critical factors in improving your business's credit score. You'll also free up available credit, which can help boost your overall credit utilization and creditworthiness.

7. Check your credit reports regularly

It's necessary to check your business's credit reports regularly so you can quickly address any errors or inaccuracies. You should review your reports at least once a year, preferably once a quarter.

You can order a single business credit report from one of the three major business credit reporting bureaus or opt for a package of reports to review all three simultaneously. This will help you keep track of your business's financial information and improve your credit score over time.

8. Apply for a business credit card or corporate card

Applying for a business credit card or corporate card can help you build your business credit. With a corporate card, you or your employees can make purchases up to a specific limit, and you can track spending so you can stay on top of your budget.

If you're currently looking for a corporate card for your business, Ramp's corporate card also helps you build business credit by reporting your payments to credit bureaus. You'll also get access to expense management, tracking, analytics, and more.

9. Build a relationship with lenders

When you're ready to apply for financing, building relationships with lenders familiar with your business is crucial. A lender who knows your operations and financials will be better suited to determine if you're eligible for financing and can offer more competitive rates.

Another reason that having a good relationship with your lender could benefit your business is that if you're unable to make a full or partial payment, you might be able to receive some form of payment accommodation. This obviously shouldn't be a regular occurrence for you, but if you find yourself financially stuck, a good relationship could go a long way for you and your company.

10. Keep your accounts open

Just like with personal credit accounts, having older accounts open longer can help boost your credit score. Accounts with longer histories are looked upon more favorably, so you want to keep accounts open for as long as possible.

If you're no longer using a particular credit card or loan, consider keeping it open and using it occasionally to help maintain your credit score. Just make sure you pay off the balance each month so you don't incur additional interest charges.

How long does it take for a business to build a good credit score?

It can take a business up to three years to build a strong credit score. If you're just getting started, it's important to know that companies with an established history of timely payments and responsible financial management may be able to develop their credit faster than those without any history.

In the short term, applying for financing or taking on debt may help to increase your company's credit score. However, it can also have a negative impact if not managed properly. Ultimately, the best way to build business credit is by consistently making timely payments and establishing relationships with creditors who report payment information to major credit bureaus.

How charge cards help you build business credit

Understanding the difference between credit and charge cards can become a real game-changer for your business credit score. Although they are used interchangeably, there are some critical distinctions between charge cards and regular credit cards.

Credit cards are revolving lines of credit that allow you to purchase items and pay them off over time, while charge cards require the balance to be paid in full at the end of each billing cycle. Using a charge card can help your business boost its credit score since the balance is paid on time and in full every month.

This helps to demonstrate financial responsibility and can be a great way to build your business credit over time. It can also help you create better spending habits for your business, as charge cards don't allow you to overspend, since the bill doesn't carry over like it does on credit cards.

Credit reports will list both charge cards and credit cards. However, with business credit cards, your credit utilization can mean the difference between a good business credit score and a bad one.

To calculate your credit utilization, you take your total balance and divide it by your total credit limit, as shown below:

Credit Utilization = Total Balance/Total Credit Limit

For example, if you have a credit limit of $10,000 and your total balance is $2,000, your credit utilization would be 20%. A good rule of thumb is to keep your utilization below 30%, which can help boost your business's credit score. Consistently having a lower credit utilization is usually better, but keeping it under 30% is the best way to keep a higher credit score.

Build your credit and control spending with Ramp

You can ditch the headaches of traditional business credit cards by choosing Ramp.

Not only does our charge card report to the major business credit reporting agencies, but it also offers powerful spend management software to help you manage and control your spending. 

Ramp offers a different corporate credit card experience—one where spending less is the priority. Instead of points and perks that encourage further spending, our cards come with spend management software that finds you ways to save.

With Ramp's unique approach to corporate cards, you get innovative software first and a card second. See why Ramp is the preferred business credit card solution.

Try Ramp for free.
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Former Sr. Content Marketing Manager, Ramp
Prior to Ramp, Stefanie worked as a finance reporter at Institutional Investor, where she covered everything from options to pension funds. She graduated from the University of Delaware with a degree in English and a concentration in journalism and later earned an MA in education from NYU. When she isn't immersed in content and thought leadership, Stefanie loves to play any and all racquet sports.
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