Why Startups Are Struggling To Build Business Credit and How To Fix It?

Spread the love

For a while now, businesses have been struggling to obtain the business credit they need. Last year’s National Federation of Independent Business (NFIB) survey illustrated that credit has been at an all time high in terms of difficulty to acquire. Furthermore, the quantity percentage of small businesses borrowing at least once a quarter has dropped 10% over the last four years.

Given the importance of business credit for the expansion and growth of companies, it is vital for small businesses to be aware of how they can improve their credit in order to access the capital they need to both survive and succeed. This article will explore the ways in which a business can improve their credit score, plus a deep dive into why small businesses at the moment are struggling in the first place.

Why Are Startups Struggling To Find Credit?

The NFIB survey’s reveal that businesses are finding it harder than ever to secure credit is sadly unsurprising. It has been an age-old chastisement of economists and SME advocacy groups that the ability to acquire capital is positively correlated with firm size. Furthermore, small businesses find it far more difficult to secure credit than their larger competitors. 

The same trend is true even among small businesses, with the smallest companies having an even lower chance of securing capital than their barely larger counterparts. Furthermore, a paltry 16% of businesses with less than five employees have a business loan, and 34% have a line of credit, the NFIB survey shows.

In stark contrast to this, nearly 60% of businesses with 50-250 workers were able to secure a business loan and over 65% had good credit history. Clearly there is a problem surrounding the ability of small businesses to build their business credit, but what can be done?

What Can Be Done To Improve Credit?

Make Your Business A Legal Entity

Many businesses struggle because they are not incorporated. Registering your business as either an LLC or corporation is almost always a better option when looking to acquire loans. The explanation for this is pretty simple: it makes you appear more reputable and trustworthy if you are verified in this way.

Furthermore, these business structures provide a form of protection for assets called limited liability protection, which separates the personal assets of the business owner from the assets of the businesses so that only the latter can be pursued to reclaim business debts. 

Lenders prefer these incorporated businesses because they see this protection as applying to them by extension. Therefore, due to reduced riskiness lenders view loans made to such companies, they are more likely to offer them.

Take Advantage of Net-30 Accounts

Another alternative for small businesses is to utilize Net 30 vendors. This allows them to build a good credit history that can be tracked by the major business credit bureaus. A Net-30 account simply allows businesses to purchase certain goods on credit and repay the invoice within 30 days.

The faster you repay the invoice for these payments the better this will reflect on your credit score and the faster it will improve.

Utilize Business Credit Cards

The use of a credit card in the name of your business is a step up from these previous suggestions when talking about improving credit. In a similar vein to the Net-30 suggestion,  swift repayments in conjunction with regulated spending will enable a business to be entitled to greater and greater credit limits over time. 

If a business is successful in managing their credit responsibly over time, this will reflect extremely well on their credit reports that potential lenders can review.

Be Responsible With Business Loans

If a business achieves a high enough credit score by following the previous pieces of advice, new financial doors will be open to it in the form of business loans. While the initial goal of improving credit is to secure more capital, they represent a prime opportunity to further skyrocket it.

Managing these business loans wisely and repaying them swiftly will earn a business a right to loans at the most favorable rates.

Final Comments

Evidently, there is a clear problem surrounding the ability of small businesses to secure credit. Following the aforementioned pieces of advice are a good point of reference to improving credit, for more information on how to build business credit fast, see The Really Useful Information Company’s (TRUiC) resource.

Spread the love