It can sometimes feel like a catch-22. Part of building a strong credit profile is responsibly using your business credit, but obtaining that business credit so you can responsibly use it is sometimes easier said than done—especially for young companies just getting started. As a result, it might be tempting to use your personal credit for business purposes, thinking that will help demonstrate that you know how to properly use credit. Unfortunately, it won’t help you build your business’s credit and the higher credit utilization often associated with business expenses can actually negatively impact your personal credit profile.

Although establishing credit can be a challenge in the first year of doing business, and you might not be able to get a loan at the local bank, there is typically credit available to help you establish a strong profile that is relatively easy to get. Vendor credit is a smart way many new businesses establish their credit profile.

Unlike using your personal credit cards to pay for merchandise from your suppliers, establishing credit relationships with vendors and suppliers will help you build your credit profile—provided your vendors report to the appropriate business credit bureaus. Nevertheless, similar to using your personal credit for business purposes, if your vendors and suppliers don’t report to the bureaus, you may be building your credit reputation with that particular vendor, but it won’t otherwise help your profile.

Peter Bolin, Experian Director of Consulting and Analytics, while talking about a study conducted by Experian earlier this year that looked at startups and young companies said, “In our study group, an average Experian business credit score of 23 (on a scale of 1-100) the first year of business, soon improves to somewhere in the 30s, and eventually moved into the 40s. New businesses might equal lower scores, but the average small business owner is creating 1-1/2 trade credit relationships each year and using smaller loans to build their credit profiles over the first few years. Ultimately indicating to us that many of these businesses are great borrowers.”

In other words, it’s not uncommon for a new business to have a thin credit profile, meaning they haven’t had enough time in business to build a strong profile yet because they don’t have many credit accounts. But those businesses that pursue a credit-building strategy of utilizing the credit available from their vendors and other suppliers are able to greatly improve their profiles over time—demonstrating to credit bureaus, like Experian, that they are potentially good borrowers.

Trade credit is probably one of the easiest ways to establish your business credit profile and a great way to build a solid business credit foundation.

“It’s not likely you’ll be able to go into the bank and get $100,000 for working capital,” says Bolin when referring to these younger companies. “Start by establishing trade credit with your vendors. Make sure they report to the credit bureaus, like Experian, and make sure you make your payments on time. Apply for a business credit card and make sure you make those payments on time. This will dramatically increase the depth of your credit report so when you do need that $100,000 from the bank or other lender, you’ll be likely to get approved. Additionally, don’t use your personal credit for business expenses. Take the time to establish a strong business credit profile. Consider it an investment in the future of your business.”

A healthy profile doesn’t just happen. Taking a strategic approach to building and creating the credit relationships today that will help you down the road is a great way to start off the New Year.

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