Building company credit can be one of the most important financial steps for small business owners. It can open doors to better loan terms, higher credit limits, and an easier path to financing. But did you know that using business credit cards effectively can play a key role in building your company’s credit profile? If done right, business credit cards can be a game-changer for your business’s financial health and growth.
Let’s dive into how you can use business credit cards to help build your company credit step by step.
The Power of Business Credit Cards
First things first: business credit cards are not just for managing day-to-day business expenses—they can be an excellent tool for establishing business credit. In fact, they can be one of the easiest and quickest ways to start building your business’s credit profile.
Unlike personal credit cards, which are tied to your individual credit score, business credit cards report to business credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business. These bureaus track your business’s creditworthiness just as they do with personal credit. By establishing a good relationship with your business credit cards, you’re laying the groundwork for a strong company credit score.
But how exactly do you get started?
1. Choose the Right Business Credit Card
When it comes to business credit cards, not all are created equal. Before you apply for a card, it’s important to consider what type of card will work best for your business. Some cards offer cashback rewards, while others focus on travel points or flexible financing options. The key is to pick a card that aligns with your business needs and will allow you to maximize your rewards while also building credit.
Look for a card that reports to the business credit bureaus and offers credit limits that can grow over time. A higher credit limit will help improve your credit utilization ratio, which plays a major role in building good credit. If you’re just starting out, some secured business credit cards might be an option. While they require a deposit, they can provide you with an opportunity to build business credit without the risk of overspending.
2. Make Timely Payments
Once you have your business credit card, the next important step is to make timely payments. Payment history is one of the most significant factors that affect your business credit score. Late payments can hurt your credit score and can even lead to penalties, which could affect your ability to secure future financing.
Ideally, you should aim to pay off your balance in full each month. However, if that’s not possible, at least make sure you pay the minimum payment before the due date. Setting up automatic payments can help you avoid forgetting a due date and ensure you stay on top of your business’s credit responsibilities.
Another great strategy is to make multiple payments throughout the month to keep your balance low. This can help reduce your credit utilization rate, which is another key factor in determining your business credit score. A lower utilization rate shows that you’re not relying too heavily on credit, which can be a sign of financial responsibility.
3. Keep Your Credit Utilization Low
Credit utilization refers to the amount of credit you’re using compared to your total credit limit. For example, if you have a credit limit of $10,000 and you’re carrying a balance of $2,500, your credit utilization is 25%. Ideally, you want to keep your credit utilization ratio below 30%. This is because higher utilization can signal to credit bureaus that you might be overextending yourself financially, which could negatively affect your credit score.
The key here is to only use a small portion of your credit limit and aim to pay off your balances regularly. Even if you don’t pay the full balance each month, keeping your credit utilization low will go a long way in helping you build a positive credit history.
4. Avoid Using Personal Credit for Business Expenses
One of the biggest mistakes small business owners make is using personal credit cards for business expenses. Not only does this mix personal and business finances, but it can also make it more difficult to build business credit.
By using a business credit card exclusively for business transactions, you’re ensuring that all of your financial activity is reported under your company’s name, which is exactly what you want when it comes to building business credit. Additionally, it allows you to keep your personal finances separate from your business finances, which makes tracking expenses and preparing your taxes much easier.
5. Keep Track of Your Business Credit Report
Just as you monitor your personal credit report, it’s important to regularly check your business credit report. This allows you to keep an eye on your credit score and ensure that all of your financial activities are being reported correctly. If you notice any discrepancies, be sure to contact the relevant credit bureau to resolve them as quickly as possible.
Many business owners don’t realize that their business credit score can be impacted by issues like late payments or high credit utilization, even if the issues were caused by someone else. By regularly checking your report, you’ll be able to catch potential problems early and take action before they negatively affect your ability to get financing in the future.
6. Use Your Card for Business Expenses (Without Overdoing It)
Using your business credit card for regular business expenses is a great way to build your credit score, but there’s a balance. You want to make sure that you’re not spending excessively or charging things that aren’t truly necessary for your business. You should aim to use the card for expenses that contribute directly to the growth and operation of your business, such as office supplies, software subscriptions, or marketing costs.
By doing this, you’ll be able to build a positive payment history while keeping your spending under control. Be sure to only charge what you can afford to pay off in a timely manner, so you’re not carrying a large balance that could hurt your credit score.
7. Understand Your Credit Score and What It Means
Your business credit score works similarly to a personal credit score, but it’s based on factors related to your company’s financial behavior. The score ranges from 0 to 100, with higher scores indicating better creditworthiness. Your business credit score is influenced by factors like payment history, credit utilization, and the length of your credit history.
The three major credit bureaus—Experian, Equifax, and Dun & Bradstreet—each have their own scoring system. It’s essential to understand what factors influence your score and what you can do to improve it. For example, if you’re aiming to raise your score, you might focus on improving your payment history or reducing your credit utilization.
8. Apply for Credit Limit Increases
As your business grows, you’ll likely find that you need more credit to keep up with your expenses. Requesting a credit limit increase is one way to keep your credit utilization ratio low while maintaining the flexibility to make larger purchases.
Just remember, applying for a credit limit increase will result in a hard inquiry on your business credit report, which could cause a small dip in your credit score. But if you continue to manage your account responsibly, the long-term benefits of a higher credit limit will far outweigh the initial hit to your score.
Building a Strong Financial Foundation
Using business credit cards to build your company credit is just one piece of the puzzle when it comes to creating a strong financial foundation for your business. It’s important to remember that building credit takes time, but with consistent effort and smart financial management, your business can achieve a strong credit score that opens up more opportunities for growth and success.
By following these steps—choosing the right card, making timely payments, keeping your credit utilization low, and monitoring your credit—you can set your business up for a prosperous future. And while it may seem like a slow process at first, over time, the benefits of a solid business credit profile will help you achieve your financial goals and propel your business forward.