How to Build Business Credit in a Recession | 6 Steps Revealed

October 18, 2022

How to Build Business Credit in a Recession | 6 Steps Revealed
Business resources

Having access to credit and cash remains essential for any business that wants to survive in the current economy. Business credit makes it easier for your company to borrow money, which can then be used to buy services or products. Future investments, purchases, and acquisitions are made easier with a good credit score and profile.

During a recession, small and large businesses alike tend to experience a drop in revenues and profits. In this scenario, it's common for businesses to find it more difficult to gain access to credit and business loans.  

What Is Small Business Credit?

Business credit displays your company's ability to handle its purchasing power, debt, and finances. Just like personal credit, it's possible to build business credit over an extended period. However, the main difference between personal credit and business credit is that personal credit scores are based entirely on your own credit history, which includes the debt you currently have and the number of cards you've opened through the years. In comparison, business credit scores are tied to your business.

Personal credit scores range from 300-800, and business credit scores can be anywhere from 0-100. While a good personal score is anything above 700, a good business credit score is usually 80 or above. In most other situations, your business credit will determine if a lender provides you with a loan. This type of credit uses numerous factors to determine a business's creditworthiness. These factors are expressed as a business credit score. A higher score may help your business qualify for lower rates on small business loans.

Photo Credit: Unsplash

Why Small Business Credit Is Important for Obtaining Business Financing

There are many reasons why great small business credit is vital for obtaining business financing. For one, your business will need to have a strong enough credit standing to gain access to loans and lines of credit. As mentioned previously, higher credit scores usually mean greater access to loans and other forms of financing that offer lower interest rates and better terms. These financial solutions provide small businesses with the funds that can help them:

1. Launch or expand your business

2. Purchase inventory or equipment

3. Solve any cash flow issues

4. Develop a stronger relationship with your lender

5. Build your business credit further

During a recession, gaining access to credit from lenders becomes increasingly difficult, which is why building business credit can be highly advantageous at this time.

Photo Credit: Unsplash

Six Steps a Small Business Can Take for Improving Business Credit Score During a Recession

If you need funding to help your business weather a recession but find that your business credit isn't good enough, there are steps you can take to improve your credit score while a recession is ongoing.

1. Check Your Business Credit Report

The first step you should take is to check your business credit report, which will show you the credit score for your business as well as your previous credit history. There are three primary commercial credit bureaus that gather this information, which include Equifax, PayNet, and Dun & Bradstreet.  

Each bureau uses a slightly different formula to calculate business credit scores. Keep in mind that different suppliers and lenders will report details to different bureaus. You can view your business credit score on the websites for each credit bureau. Now that we're close to being in a recession, it's more important than ever to update your information with the three main business credit bureaus.  

Once you review your report, upload all your recent financial statements. You should also check the report for inaccuracies and errors. Any issues you identify should be reported to the bureau immediately. Improving your score is simplest when your business credit report is up-to-date and accurate.

2. Improve Business Fundability

Since a recession is approaching and loans will likely be more difficult to come by, it's essential that you improve your business fundability, which essentially refers to your company's ability to obtain financing.

There are several things you can do to improve your fundability. For one, make sure that your business has a website for verification purposes. You should also have a correct email and phone number—which should be toll-free—that are tied directly to your business.  

Also ensure that your business is in good standing with the Secretary of State. Finally, your company's address should be updated everywhere to ensure that it's correct and verifiable.  

3. Pay Your Bills on Time

Improve your business credit score by paying your bills on time. Not paying these bills may cause your score to drop. This is the simplest method for improving a credit score and is essential if you want your score to be high enough to qualify for loans.  

Consider setting up automatic online payments for any recurring expenses that your company owes, the primary of which include debt repayments and utility bills. It's best to get your payments in order at the onset of a recession to improve your chances of making all your payments on time.

4. Create Credit Accounts with Your Suppliers

If you work with suppliers regularly and have a strong payment relationship with them, make sure that you establish a credit account with these suppliers to display more positive payments in your file. Over time, your credit score will improve.  

Also referred to as trade references, these pieces of information show credit bureaus that you have a positive credit history. More trade references can help your business improve its credit score and standing. Taking this step now might allow you to boost your business credit before the recession is at its worst.  

5. Dispute Inquiries and Possible Errors

If there are any inquiries or negative issues on your credit report that you can't explain, consider disputing them by contacting the credit agency in question. Having an error removed can substantially improve your company's credit score and is the perfect thing to do now that the recession is starting to impact companies from all industries. Any quick improvements to your credit score allow you to access credit sooner.  

6. Lower Credit Utilization Ratio

Having a lower credit utilization ratio makes it easier to obtain credit. The best ratios are ones below 15%. It's possible to reduce this ratio by:

1. Paying off any remaining balances

2. Decreasing your business credit card spending

3. Increasing your current credit limit by contacting your credit card provider

4. Opening a completely new line of credit

Keep in mind that the recession isn't going to last forever. The business credit you build now can protect your company during the recession and in the years following.  

Photo Credit: Unsplash

How to Meet Idea Financial Application Requirements

If you want to meet the application requirements for a business loan or line of credit, Idea Financial requires:

1. Your business must be operational for three years or more.

2. Your business must earn $15,000 or more in monthly revenues.

3. Your personal credit score needs to be at least 650. We do soft credit checks that won’t affect your credit score.

4. Your business can't be a non-profit entity or sole proprietorship.

Every day, small business owners face challenges that make it increasingly difficult to do business. These challenges are even more pronounced now that the country is in a recession and good credit is essential for obtaining a loan. If you need to build credit quickly to avoid some of the consequences of a recession, it's highly recommended that you follow these steps. At Idea Financial, we can provide you with the assistance you need to recover from a financial slump.