How to Build Strong Business Credit for Your Shopify Store

As a small business owner, understanding and building business credit is crucial for your company’s financial health and growth potential. Whether you’re just starting out or looking to expand, having access to credit can provide the necessary funds to seize opportunities and weather unexpected challenges. In this guide, we’ll explore the intricacies of business credit, how to establish it, and strategies for leveraging it effectively.

Understanding Business Credit

Business credit is fundamentally different from personal credit, and it’s essential to grasp these differences from the outset. Unlike personal credit, which is tied to your social security number, business credit is linked to your company’s Employer Identification Number (EIN). This separation is crucial for protecting your personal assets and building a financial identity for your business.

When you’re just starting out, you might find that lenders are hesitant to extend credit to your business. This is because, like individuals, businesses need to build a credit history. Without a track record of timely payments and responsible financial management, lenders have little information to assess the risk of lending to your company.

It’s important to note that in the early stages of your business, most credit options will require a personal guarantee. This means that you, as the business owner, are personally responsible for repaying the debt if your business cannot. While this might seem daunting, it’s a standard practice for new businesses and shouldn’t discourage you from seeking credit when necessary.

Establishing Business Credit

Building business credit takes time and patience, but there are several steps you can take to start the process:

First, ensure your business is properly structured. Whether you’re operating as an LLC, S-corporation, or another entity type, having a formal business structure is crucial. This not only provides legal protection but also establishes your business as a separate entity for credit purposes.

Next, obtain an EIN from the IRS. This is free and can be done online in a matter of minutes. Your EIN is like a social security number for your business and is necessary for opening business bank accounts and applying for business credit.

Open a business bank account and use it exclusively for business transactions. This separation of personal and business finances is crucial for building business credit and maintaining clean financial records. Many lenders will want to see a history of business bank statements when considering loan applications.

Consider applying for a business credit card. Even if you’re just starting out with no revenue, you may be able to qualify for a card based on your personal credit score. Use this card for business expenses and pay it off in full each month to start building a positive payment history.

Strategies for Building and Improving Business Credit

Once you’ve laid the groundwork, there are several strategies you can employ to build and improve your business credit:

Consistently make timely payments. This is the single most important factor in building good business credit. Set up automatic payments if possible to ensure you never miss a due date.

Start small and grow. Don’t be discouraged if your initial credit limits are low. Many business owners report starting with limits as low as $1,000. As you demonstrate responsible use and timely payments, you can request credit limit increases.

Diversify your credit mix. While credit cards are a good start, aim to establish different types of credit accounts over time. This might include vendor lines of credit, equipment leases, or small business loans.

Monitor your business credit reports regularly. Unlike personal credit reports, you typically have to pay to access your business credit reports. However, this investment is worthwhile as it allows you to catch and correct any errors promptly.

Maintain a low credit utilization ratio. Just like with personal credit, using a small percentage of your available credit is viewed favorably by lenders. Aim to keep your utilization below 30% if possible.

Be strategic about credit applications. Each time you apply for credit, it can result in a hard inquiry on your credit report. Too many inquiries in a short period can negatively impact your score. Apply for credit only when necessary and when you have a good chance of approval.

Remember, building strong business credit is a marathon, not a sprint. It typically takes at least two years of consistent, responsible credit use before many traditional lenders will consider offering substantial credit lines or loans without requiring extensive additional documentation or collateral.

By following these strategies and maintaining patience, you can establish a solid credit profile for your business. This, in turn, will open doors to more favorable financing options, better terms with suppliers, and increased financial flexibility as your business grows and evolves.