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2019

Why improve your business’s credit score? So you can access the funding and terms you’ll want as you pursue your future goals. Here are some tips that can help.

Start by determining your business needs.

  • Cash flow
  • Cushion against risk
  • Startup or expansion
  • Large purchases
  • Seasonal changes
Moving on up. Small business lending approval rates increased to 62.8% in 2018

Know the five C’s of establishing good credit.

1

Capacity

Can your business support debt and expenses? Typically, a business needs enough cushion to absorb unexpected expenses or a downturn in the economy.

2

Capital

Do your assets outweigh your liabilities? How much capital have you and others invested? These factors can impact your ability to obtain financing.

3

Collateral

This can include accounts receivable, inventory, cash, equipment and commercial real estate. Financers may also consider existing debt you may still owe on your collateral.

4

Conditions

While you can’t control things like the economy, industry trends and new laws that can impact your business, they may be taken into consideration when assessing your ability to make payments.

5

Character

Personal integrity, industry experience, credit history and good standing are critically important, both for you and for others who are closely tied to the success of your business.

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Plus one more C that can make a world of difference:

Communication

Your willingness to communicate openly with your banker about the opportunities and challenges your business faces is key.

Follow the 5-3-2 Rule.

For small businesses, credit history is typically not considered established until you have five ‘trade credit’ accounts, three business credit cards and two loans fully paid off.

5 Vendor ‘trade
credit’ accounts

3 Business
credit cards

2 Loans paid
in full

Vendor ‘trade credit’ accounts

Develop relationships with vendors that are willing to extend ‘trade credit,’ which means allowing your business to pay with terms, such as net 30.

Tips:   Pay early. It’s a good way to improve your business credit.
Ask your vendors to report to credit agencies your responsible and on-time payment activity.

Business credit cards

Get different cards for different needs2:

  • Everyday purchases
  • Cash back rewards
  • Travel rewards

Loans paid in full

If your business is more than a year old, consider applying for a small business loan and paying it off fast. This can build a positive credit history for your business.

Here’s what the lender could ask you to provide:

  • Personal information and résumé
  • Business plan
  • Personal credit report
  • Business credit report
  • Tax returns (for the past three years)
  • Financial statements
  • Collateral
  • Legal documents
    (specific to your loan type)

Know that your personal credit can help.

Many small business owners use their personal credit to help acquire funding. In fact, some banks may require you to personally guarantee a loan or even put up equity in your home as collateral. Using personal credit may also improve your credit scores — both personal and business — provided you make timely payments. Learn more about how to improve your credit scores.

Note: Business and personal credit histories are typically treated separately, but can become linked. For instance, under the Fair Credit Reporting Act (FCRA), lenders may review personal credit in the case of a sole proprietorship.

Consider a line of credit for ongoing business needs.3

  • Allows access to cash when you need it
  • Provides flexibility to get funds anytime but not pay interest until you use them
  • Supplies coverage for emergencies — a rainy-day fund
  • Improves cash flow management
  • Offers lower interest rates than credit cards
  • Helps finance midsized to large purchases (too big for credit card)

Put these tools
to work.

Establishing good credit using the 5-3-2
rule will help you get the credit you need
to help your business thrive and grow.

Sources:

1:

“Small Business Lending Index,” Biz2Credit, October 2018

2:

All credit card accounts are subject to credit approval and credit card account limits are subject to creditworthiness. Normal credit standards apply. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Some restrictions may apply.

3:

All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Repayment structure, prepayment options and early payoff are all subject to product availability and credit approval. Other restrictions may apply.

Bank of America, N.A. provides informational materials for your discussion or review purposes only. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

Bank of America, N.A. Member FDIC. ©2019 Bank of America Corporation  ARSMNS4V | LP-10-18-0484.D | 08/2019

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