What Is Business Credit and How Does it Work?

By September 6, 2023 uLink Blog
Small business owner in her workshop.

Immigrant-owned businesses power the American economy. 

They create jobs, build communities, and provide essential products for citizens across the nation, all while representing a fraction of the total population. 

What’s the secret to their success? They have strong business credit

In this article, we’re going to explain what business credit is, how it works, and why it’s so vital for entrepreneurs and small business owners. 

More importantly, we’ll show you how to boost your business credit (while enhancing your profitability). 

But before we get into business credit, let’s start with an overview of credit itself.

Credit: A Brief Review

Credit is an indispensable financial tool

It’s the ability to borrow money and repay it by a certain date. As you know, credit products come in many forms, including auto loans, mortgages, and yes, credit cards. 

But credit is more than a lump sum of cash. It’s an agreement with specific terms and rates tailored to your unique credit profile. 

Those details are determined by two factors: the lender and your credit report.

Credit Reports and Credit Scores: Explained

When you apply for a credit product, lenders thoroughly review your credit report.

This statement contains the full breadth of your loan history and the status of your credit accounts—new and old. 

When lenders review your credit report, they’re assessing your “creditworthiness” (i.e., your ability to repay debts).

Your success rate is often presented as a credit “score,” which ranges between 300 and 850. 

Generally speaking, the higher your score, the better your loan products (and rates).

How Business Credit Works

Now that we’ve covered the fundamentals of credit, let’s apply it to the business realm. 

Business credit is the metric lenders use to assess your company’s creditworthiness.

With a strong business credit profile, entrepreneurs can access working capital through products like a business line of credit, a term loan, or a small business credit card.

When used strategically, these products can help enhance your company’s credit profile. 

As your credit profile improves, so will your access to more compelling loan products. 

Business Credit vs. Personal Credit

As we’ve discussed, business and personal credit are similar (but not the same). 

For example, all business credit information is reported to specialized credit bureaus, including Dun & Bradstreet, Experian Commercial, and Equifax Small Business.

And while your personal credit score generally ranges from 300 to 850, your business credit score scales between 1 and 100. 

Though the details are distinct, the principles of “good credit” are similar for both: responsible loan management improves credit, while irresponsible management harms it. 

Important: While your business and personal credit profiles will ultimately be kept separate, they’re not mutually exclusive—at least not in the application phase. 

Here’s why: when you apply for a business credit product, some lenders may review your personal credit history, especially if it’s your first time applying for a business loan product. 

That’s why it’s so important to carefully effectively manage your personal finances and always repay debts on time.

Once you have established your business credit history—and after you have developed a trusted relationship with a particular lender—your personal credit history will play a less decisive role in your access to working business capital. 

Importance of Business Credit for Immigrant Businesses

According to recent studies, nearly 44% of Fortune 500 companies were founded by immigrants or their children. 

While immigrants represent just 13% of the population, they comprise almost 22% of all small business owners in the United States. In fact, immigrant business owners generate over $1.3 trillion in total annual revenue

Such dominance would not be possible without strong business credit—the tool that enables entrepreneurs to get financing and grow their companies.

Business credit also empowers business owners to purchase equipment and machinery, to streamline operations and payroll, and to make essential renovations and upgrades in an increasingly competitive market.

Nevertheless, building business credit can seem daunting—especially for recent immigrants.

In some cases, the desire to succeed can force hasty financial decisions.

While it may seem tempting to do, avoid funding your business ventures with personal financial tools. That includes your credit cards, your home equity, or loans from family and friends. 

While such resources might appear practical, they could quickly endanger your personal credit and assets.

That’s why business credit is such an important tool for entrepreneurs. It separates your personal and business finances, and it provides far more funding than personal credit can match.

Plus, it positions you to improve your business credit profile, as we’ll discuss below.

6 Tips to Improve Business Credit

Though the financial world may be complex, it’s not mysterious. 

In fact, the inner workings of business credit are well known, including the following six ways to help improve it.

Note: While the first two tips pertain to new business owners, the latter four are useful for business owners of all experience levels.

1. Establish Your Business

Before you set about bettering your business credit, make sure your business is fully established.

If you haven’t done so already, you’ll need to decide on one of four common business structures:  a proprietorship, a corporation, a partnership, or a limited liability company (LLC).

Once you create a legal business name (and establish a business phone number), you’ll need to officially register your business with your Secretary of State. 

After that, you’ll receive your employer identification number (EIN), which is what the government uses to identify your business. 

Later on, your EIN will be used to file taxes, to apply for business licenses, and to open/access credit products.

2. Open a Business Bank Account 

Now that you’ve set the foundation for your firm, it’s necessary to open a business bank account. 

This accomplishes two things: first, it officially separates your business and financial expenses.

Secondly, it establishes a working relationship with a banking partner—a relationship you’ll rely upon for many years to come. 

After all, your bank will become your point of contact for accessing working capital (and other credit products) to help fund your business venture. 

3. Consider a Small Business Credit Card

The financial benefits of a small business credit card are undeniable.

You’ll receive fast access to capital, you’ll get a higher credit limit than personal cards, and you’ll enjoy amazing rewards along the way.

Plus, many business credit cards offer 0% APR periods for the first few months. This can help you make the purchases you need without incurring high interest rates.

More than anything, a small business credit card empowers you to build business credit

After all, it puts you in a position to show lenders that you can confidently handle loans and consistently repay your debts.  

4. Pay Bills on Time

While this may sound too good to be true, it’s the truth: if you pay your bills on time (and in full), your business credit will improve. 

It’s that simple.

In fact, timely payments are the #1 factor in both your personal and business credit profiles. 

P.S. Want to take things to the next level? If you can pay your bills early, you’ll be able to build your business credit even faster

5. Lower Your Credit Utilization Ratio

While it’s important to pay bills on time, it’s equally important to keep your credit utilization ratio low.

And what is your credit utilization ratio? It’s the amount of credit you’re using divided by the amount of credit you have available. 

Financial experts encourage consumers to keep their credit utilization ratio below 30%.

Here’s how that looks in practice: let’s say you have two business credit cards—one with a $20,000 credit limit, and another with a $30,000 credit limit.

In that case, your total credit limit would be $50,000. 

To maintain a healthy credit utilization ratio of 30%, you should try to use no more than $15,000 at any given time.

Though this may seem rather limiting at first, it will help protect you from getting overextended and stuck in a debt cycle

Plus, it will help preserve your credit score.  

6. Review Your Accounts and Credit Report 

Knowledge is power. 

As a business owner, you’re the first and last line of defense for your company’s financial reputation. That’s why it’s important to always review your accounts, check your credit report, and eliminate any errors or fraudulent charges.

Unfortunately, such mistakes are prevalent in our fast-paced economy. Just last year, Equifax sent lenders the wrong credit scores for over 300,000 consumers.

In general, over 20% of consumers have significant errors on their credit reports, which could cause lenders to reject their loan applications.

It’s up to you to defend your financial profiles. Click here to check your business credit reports for free. 

Business Loan Resources

Looking for more ways to fund your business venture? 

Check out these small business loan and grant resources:

  • SBA Loans: The Small Business Administration (SBA) helps entrepreneurs launch their business by connecting them to specific lenders.

    Naturalized citizens, lawful permanent residents (LPRs), and lawful non-permanent citizens can all qualify for funding.

    Click here to learn more.

  • MicroLoans: The SBA also hosts a MicroLoan program that provides entrepreneurs with a lump sum to launch their business.

    Average loans are roughly $13,000 (with a maximum of $50,000).

    Click here to learn more.

  • Microenterprise Development Program for Refugees: Offered by the Department of Health and Human Services, this unique program provides grants and micro loans as high as $15,000.

    Click here to learn more.

  • Wilson/Fish Alternative Program: As a secondary offering from the Department of Health and Human Services, the Wilson/Fish program provides a range of tools beyond
    money alone.

    While delivering cash resources, it offers medical help, English language training, job mentorship, and more.

    Click here to check your eligibility.

As an immigrant, there are many resources available to you and your company.

For more information on funding initiatives, be sure to explore grants.gov and the Minority Business Development Agency.

Moving Forward

Small businesses are the heart and soul of America.

As a small business owner, you’re doing much more than growing the economy. You’re connecting people, families, and communities with amazing products, services, and the promise of a better future.

At uLink, we’re dedicated to helping you succeed, here in the United States and overseas. uLinkbusiness features a reliable platform for international transfers for businesses based in the U.S.—a fast and secure solution for all your international B2B payments needs. With great exchange rates, your business now has a one-stop shop for business payments.

uLinkbusiness—linking your business to the world.

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