For many entrepreneurs, launching a small business is no easy feat. According to a 2024 survey by retail platform Shopify, small business owners spend an average of $40,000 in the first year. Solopreneurs and freelancers spend less on small businesses, but can expect to spend more as they expand their team. Every employee you hire increases your overall costs, with the average business spending 18.8% of their first-year budget on these new hires.
Some businesses require more capital to launch. For example, let’s say you want to open a restaurant and need to buy all the equipment and furniture. Or you want to buy, renovate and sell real estate. Be that as it may, if you don’t have the cash or an investor willing to provide you with money, borrowing money may be your best option. In this case, your credit score needs to be especially attractive to lenders, especially if you want to go beyond a business credit card and apply for a small business loan.
How to prepare your credit for a big business adventure:
Get your personal credit report
If this is your first time taking out a business loan, you won’t have a business credit report. This means that the information in your consumer credit report is used to determine your creditworthiness for a small business loan.
Get all three credit report files from TransUnion, Equifax, and Experian. The best way to get them is from AnnualCreditReport.com, a government-certified website that gives you free weekly access to all your reports. Read your credit report carefully. If you find false negative information, dispute it with the credit bureaus. They have 30 days to review your application, so do it as soon as possible, especially if you plan to apply for a business credit card soon.
Your report should also have plenty of positive information. Having a thin credit file — that is, having few or no accounts listed — isn’t an advantage. Lenders don’t know what kind of risk they are taking on you as a borrower.
Build personal credit
If you don’t have the requisite credit history, consider applying for one or two personal credit cards before applying for a business loan.
For example, starter credit cards are a good choice for people who want to improve their credit score as quickly as possible. Use them to make a few small purchases each month, then pay off the balance in full. Depending on your situation, you might also apply for a credit-building card to help correct previous credit mistakes. Once you’ve built up a history of on-time payments and low monthly balances, consider applying for a rewards credit card to further improve your credit score while earning rewards on your purchases.
You receive your FICO credit score after you have at least one account open and active for six months. A VantageScore can be generated one to two months after your account is on file. Both scoring systems measure your creditworthiness based on the data in your credit file and regularly update your credit score. Scores range from 300 to 850, with scores above 750 making you more likely to qualify for a business loan.
As you build your credit score, make sure you make on-time payments as often as possible and pay off your balances in full.
Applying for a Business Credit Card
If you’re using business credit for the first time, you should probably start with a business credit card. The best business credit cards have generous credit limits so you can cover your business expenses even if you don’t have a lot of cash flow yet. That means you need to make sure you can pay for your purchases with your business credit card. If you’re carrying a monthly balance, try to keep it as low as possible and make a plan to increase your business income so you can pay off your balance in full as soon as possible.
Many business credit cards offer perks designed to help small business owners save money. For example, the Ink Business Cash® Credit Card offers the following:
- 5 percent cash back each account opening year on the first $25,000 spent on purchases at office supply stores and internet, cable and phone services
- 2 percent cash back on the first $25,000 spent on gas station and restaurant purchases each account anniversary
- 1 percent cash back on all other purchases
Plus, new cardholders can get a welcome bonus worth up to $750 in cash back ($350 after you spend $3,000 in the first three months of account opening, and another $400 after you spend $6,000 total in the first six months). To help you manage these new business expenses, The Ink Cash offers an introductory 0% interest rate on purchases for 12 months (18.49% to 24.49% variable rate thereafter).
The more you know about how business credit cards work and how to choose a business credit card for your small business, the better prepared you will be to use a business credit card to build a good credit history. No matter what happens in your first year as a small business owner, make sure you pay your credit cards on time. Even just paying the minimum on your credit accounts is better than nothing. Doing so will help you avoid a negative credit history that could prevent you from getting a business loan in the future.
Obtaining a Business Credit Report
You can’t obtain a business credit report until you’ve established your small business to the point where creditors and suppliers can provide information to the business credit reporting agencies.
This means that even if you don’t work closely with your vendors and suppliers yet, you can often build a good business credit history just by opening a business credit card and paying it off in full every month. After all, many start-up businesses are home-based, and small business owners who use their business credit card to automatically pay for subscriptions like Adobe Creative Cloud and Microsoft 365 can build the credit history they need to build a business credit report.
The most common business credit reports are provided by Dun & Bradstreet, Experian Business, and Equifax Business. A business credit report contains the information lenders need to make an informed decision about your business’s health and credit history. For example, it shows a record of payments to suppliers and repayments to lenders, current bank balances and activity, and company assets, inventory, and sales, if applicable.
Your business credit report will also show any liens, judgments, and bankruptcies related to your business. These types of derogatory listings can remain on your business credit report for years to come.
As with consumer credit reports, the most important element of a business credit report is your payment history. When you borrow money according to the terms of your contract and pay on time, lenders know you’re a responsible business partner. The longer you use business loan products successfully, the more confidence lenders have in you as a business owner.
Applying for a Loan to Fund Your Business
Once you’ve established a good credit history and can prove it with your business credit report, you can start applying for a small business loan. Business loans are available from the Small Business Administration, as well as traditional banks, credit unions, online lenders, and microlenders. With a business loan, you borrow a set amount and make regular monthly payments until it’s paid off. If you’ve been in business for a few years and have good credit, you can get the largest loan amount at the lowest interest rate.
You might also consider a business line of credit (LOC). These flexible loans work like a credit card, allowing you to borrow up to a preset credit limit. Lenders will review your credit score, annual revenue, and business history to determine if you qualify.
A business that’s been running for a long time can help you qualify for larger lines of credit and substantial business loans. But even if you’re just starting out, a strong revenue base and collateral can put you in a positive position. What’s standing in your way? Debt.
Most lenders will evaluate your debt-to-income ratio (DTI) when determining whether you qualify for a loan. DTI compares your gross monthly income to the sum of your monthly payments to creditors. So if you already give 40 percent of your gross monthly income to creditors, your DTI is 40 percent. This ratio helps lenders determine whether you have the ability to pay. The lower your DTI, the better, so you should pay off as many of your current financial obligations as possible before applying.
According to Sands, factors such as past revenue to support repayment ability, marketing and sales data to support future projections, and current contracts also help determine whether you qualify for a loan.
“The stronger the applicant’s credit profile and financial information,” he explains, “the more likely they are to receive the loan.”
Once you have the loan product you need, make sure you put it to good use. Leveraging the bank’s deep pockets to cover your start-up costs is a great strategy, but it’s just the beginning. All of this borrowing and repayment activity will show up on your credit report, so make sure you only include what you can repay and pay on time each month. This will put you in a position to qualify for bigger and better credit cards and loans when your business is ready.
Bottom Line
Remember, at the end of the day, banks and other lenders want to lend money to qualified borrowers. After all, it’s part of their business model. Take action now to make yourself the most attractive borrower. If your personal credit score isn’t at a level that allows you to apply for a business credit card, start there.
Once you’ve established a good business credit history, you can begin applying for small business loans. As your business, and your business creditworthiness, continues to grow, you may be eligible for higher limits and credit.
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