Mastering Small Business Credit

Small businesses are the backbone of the American economy, employing nearly half of the workforce and making up 99.9% of all U.S. businesses. However, navigating the complexities of building and maintaining good business credit can feel like a herculean task for many small business owners. Drawing on insights from various experts and experienced business owners, this article delves into the intricacies of cultivating robust business credit, with a special focus on the insights shared by April Coleman of Jackson, MS-based Coleman’s A/C Heating & Appliance Repair, and Rosie Fierro of Roupa Fashions. Additionally, we’ll explore the latest findings from the Federal Reserve Bank of Atlanta’s Small Business Credit Survey (SBCS) to provide a comprehensive guide for small business owners eager to improve their credit scores.

Why Business Credit Matters

A strong business credit score is crucial for owners. According to the Small Business Administration (SBA), good business credit ratings can secure better payment terms with suppliers, lower interest rates on loans, and even better insurance premiums. More importantly, it opens doors to a plethora of financing options that can fuel business growth.

For instance, April Coleman explains how establishing business credit made a tangible difference for her company: “Our credit scores allowed us to secure a loan, which we used to expand our operations and add a company vehicle.” Such expansion would have been significantly more challenging without strong business credit.

Steps to Build Business Credit

Achieving a robust business credit score involves a multi-step process. April Coleman advises, “To improve our business credit scores, we first signed up for a credit monitoring app to track all our business credit scores. Then, we opened trade accounts and consistently paid them on time over an extended period. Finally, we applied for a business credit account to build a more positive credit history.”

Rosie Fierro, the founder of Roupa Fashions, underscores the importance of foundational steps: “Starting out, I cut corners for expenses. But when I got around successful business owners, I realized how important things like having a business email are.” Registering your business with the state and obtaining necessary licenses are critical preliminary steps.

The Role of Credit Bureaus

The three major credit bureaus—Experian™, Equifax®, and Dun & Bradstreet®—compile and sell business credit reports. They also create their own business credit scores. FICO’s SBSS score is another key player in this space, blending data from various credit bureaus.

Payment history is fundamental to your credit score. Credit bureaus often measure payment history using “Days Beyond Terms” (DBT). For instance, if you have net-30 terms with a vendor and pay on day 32, your report will list 2 DBT, potentially affecting your score.

Credit Cards

One effective way to build business credit is through small business credit cards. Many small businesses, including those involving side hustles like dog walking or freelancing, can benefit from these cards. Notably, freelancers like self-employed writers and professionals with private practices, such as doctors and lawyers, are also eligible.

Insights from the Federal Reserve Bank of Atlanta

The Federal Reserve Bank of Atlanta’s Small Business Credit Survey (SBCS) provides valuable insights into the financial condition of small businesses. According to the 2023 SBCS, the top operational challenges for small businesses included reaching customers, hiring qualified staff, and managing supply chain issues. Such data emphasize the importance of maintaining good business credit to navigate these challenges.

Responsibly managing credit utilization, staying vigilant about payment histories, and choosing credit products that align with business needs can help small business owners thrive.