A business needs to keep a close eye on its credit score if it hopes to grow. Here’s how to build credit in five easy steps.
1. Be a credible company
If you want a respectable credit score, you need to be a respectable company. Legally registering as a company, complete with a legal name and business contacts, will make you more credible. Make sure you follow all the steps so that your business is set up properly.
2. Get a DUNS number
Get a DUNS number for your business, also known as a Data Universal Numbering System. This is your company’s personal identity number for credit scores. Using your DUNS number, any investor, lender, or customer can check your credit score. It’s free to get a DUNS number, and once you do, you can start building your credit score. Make sure you’re registered with a credit reference agency – if your business isn’t on their radar, it will take longer to build credit.
3. Pay your bills
This is common sense: if you don’t pay your invoices and bills on time, you’re going to damage your credit score. It’s always important, but it’s especially crucial to pay your bills on time as you try to build credit. Make sure you aren’t taking on more liabilities than you can manage. You need to be able to pay your bills on time, or better yet, before they’re due. Paying your bills early is one of the best ways to build credit.
4. Do not rely on credit
Using credit is unavoidable for most small businesses, but you should never become reliant on it. As you build business credit, you need to prove that you aren’t going to depend on credit to fund your venture. The credit utilization ratio is used to find how much of your available credit you actually use. The lower, the better. Generally, you shouldn’t aim to be using more than 30% of your available credit at any time.
5. Work with suppliers who work with a credit agency
Where possible, look for suppliers who share their payment data with credit agencies. Not all suppliers will be diligent about this, so you should work on building a good relationship so that you can push them in the right direction when it comes to reporting your timely payments.
How to build credit as a sole proprietor
If you’re operating as a sole proprietor, you don’t need a separate line of credit for your business. That’s because your business finances are intermingled with your personal finances. While that can cut down on the admin of managing two bank accounts and all the associated costs, it can also make it extremely complicated to divide your business-based transactions from your personal spending.
Moreover, it means you don’t have the opportunity to build credit exclusively for your company and any hiccups in personal bill payment or other credit issues you have had could return to haunt you. That means one of the best ways to build credit as a sole proprietor is to set up your business as an LLC or corporation instead. This means your business credit will stand alone – it won’t be impacted by your personal score or financial habits.
How long does it take to build credit?
There’s no set window of time to build business credit, but it can take between 1-3 years to attain a meaningful credit score.
You can speed up the process in a few ways, such as:
Paying bills early
Utilizing as little credit as possible
Increasing (but not utilizing) your credit limit
Regularly checking your credit score report to ensure there aren’t any errors
Some credit bureaus may also offer tools that connect directly with your bank account and monitor your payment schedule to confirm you are a reliable customer. Based on this information, your credit score may improve.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.