The Federal Reserve voted against increasing the federal funds rate this week, and many small business owners have breathed a sigh of relief. An increase increase in the funds rate typically leads to an increase in the Federal Prime Rate, or the best interest rate at which borrows can get credit cards, mortgages, loans and other types of financing small business owners rely on.
Even though the Fed didn’t vote to increase the prime rate this month, the prime rate is still half a percent higher than it was this time last year, and business owners are likely still seeing increases to their interest rates.
With interest rates continually rising, many small business owners are looking for ways to keep their financing affordable. While you may not be able to do anything about the Federal Prime Rate, the best way to fight rising business interest rates is to build your credit scores, so you can qualify for the best available lending options.
You may have ideas of how to build your personal credit, but as a business owner, you should also learn how to move forward with your business credit as well.
Establish separate business credit
If you’ve been using your personal credit and finances to run your business, you may be missing out on the opportunity to build a separate credit profile for your business. Having business credit opens up new lending options for you and can help you qualify for better financing for your business.
There are a few steps you can take to establish business credit. First, you should see if you need an Employer Identification Number (EIN). An EIN works like a social security number for your business. You can use it to apply for credit in your business’s name.
Next, you should consider registering your business with Dun & Bradstreet. Dun & Bradstreet is a credit bureau that only tracks business credit scores, and many lenders require businesses to have a D&B report to qualify for financing. To register, you’ll need to apply for a D-U-N-S® Number, so D&B can start tracking your business.
Once you’ve got you’ve used your EIN to apply for credit and gotten your D-U-N-S Number, you can contact your lenders to make sure they are reporting your business credit activity to the bureaus and start building your business credit profile.
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Grow your business credit profile
Business owners with solid business and personal credit can qualify for better financing options than owners with lower credit scores. Following sound credit practices such as making on-time payments and carrying low balances can only help as you move forward.
Open business tradelines
Tradelines are one of the top ways small businesses use credit, and if you regularly buy business supplies from the same retailer, you should see if you can set up a payment agreement. Credit agreements through suppliers are often easier to secure than loans, and they can help you build your credit for when you need to apply for capital.
Pay your bills regularly
If you already have open tradelines or loans, you can improve your business credit profile by paying your bills promptly. Most of us are familiar with how paying your bills late can ding your personal credit scores, but with business credit, certain score models will actually reward you for paying bills early. For example, your D&B Paydex score could go up if you pay your bills before they are due.
Manage your credit utilization
After payment history, your credit usage is the biggest factor in your business credit profile. Basically, lenders want to know if you are likely to completely max out your credit limits when you are offered financing.
You can improve your credit utilization by only using some of your available credit or by increasing your credit limits. There’s no way to know exactly what percentage of your credit you should use to get the best score for your business, but businesses with the best credit scores tend to use around ten percent of their available credit.
Practicing these habits should help your business credit, but you should also try to monitor your business credit as you go. This way you can catch any issues that are holding your credit back.
Explore your lending options
There are many different financing options available for small businesses, including traditional bank loans and online options with fewer credit restrictions. It’s hard to know what financing is best for you, but if you know what options are available, you may be able to find financing with lower interest rates. You can get matched up with the best financing options for your business with Nav.
Once you’ve built a strong business credit profile, you could qualify for more lending options. When you’re first searching for new financing, it can be tempting to jump at the first promising option, but if you have strong credit, there may be better options for you.
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