How to build credit for a business

Building a strong credit profile is crucial for any business looking to secure financing, attract investors, and establish reliable supplier relationships. In Canada, a business's credit history can significantly impact its ability to grow and succeed.

Just as individuals have credit scores that determine their creditworthiness, companies also have credit reports and scores that lenders, suppliers, and other stakeholders use to assess their financial health.

Whether you're a business veteran or a millennial entrepreneur, understanding how to build and maintain good credit is essential. A robust credit profile can open doors to better financing options, favourable supplier terms, and enhanced business opportunities. This guide provides Canadian business owners with practical steps to build their credit.

What is business credit?

Business credit refers to the ability of a company to obtain financial resources based on its creditworthiness, separate from the personal credit of its owners. This creditworthiness is determined by the business's history of managing debt and its financial stability. Like personal credit, business credit is tracked by credit reporting agencies and includes information on the company's credit accounts, payment history, and overall financial behaviour.

How does business credit work?

Business credit works similarly to personal credit, but is specific to a business entity. When a business borrows money, purchases on credit, or enters into financial agreements, these activities are reported to major business credit bureaus like Equifax Canada and TransUnion Canada. These bureaus compile the data into a business credit file, which lenders, suppliers, and other entities use to assess the business's creditworthiness.

Key components of business credit include:

1. Credit accounts: Loans, credit cards, lines of credit, and other financial products used by the business.

2. Payment history: Timeliness and consistency of payments made by the business.

3. Credit utilization: The ratio of credit used to the total available credit.

4. Public records: Information on bankruptcies, liens, or judgments against the business.

5. Credit inquiries: Records of who has accessed the business's credit report.

Importance of business credit score

Building and maintaining a strong business credit profile is essential for Canadian businesses. It facilitates access to financing and favourable terms and enhances overall financial stability and growth potential. Businesses may not be able to get a loan with bad credit, so building your business credit score is crucial for success.

Access to financing

Lenders use business credit scores to assess the risk of lending to a company. While the average credit score may give you a good chance of getting financing, a high credit score can make it significantly easier to obtain small business loans and lines of credit with favourable terms.

Supplier relationships

Suppliers often review business credit scores before extending trade credit. A good credit score can help secure better payment terms and lower prices, improving cash flow and profitability.

Business insurance

Insurers may use business credit scores to determine premiums for business insurance policies. A strong credit score can lead to lower insurance costs.

Attracting investors

Investors and venture capitalists often consider a company's credit score as part of their due diligence process. A solid credit profile can make a business more attractive to potential investors.

Business growth

A good credit score provides financial flexibility, enabling businesses to seize growth opportunities, invest in new projects, and weather economic downturns.

Establishing your business

Register your business

The first step in establishing a business in Canada is to register it with the appropriate provincial or territorial government. Business registration provides legal recognition and is necessary for tax purposes, entering into contracts, and protecting your business name. Here are the steps to register your business:

1. Choose a business structure: Decide whether your business will be a sole proprietorship, partnership, or corporation. Each structure has different legal and tax implications.

2. Select a business name: Choose a unique name that reflects your business and complies with provincial naming regulations. Conduct a name search to ensure it is not already in use.

3. Register the business name: Register your business name with the appropriate provincial or territorial authorities. This process varies by region, so check the specific requirements for your location.

4. Obtain necessary licenses and permits: Depending on your industry and location, you may need licenses and permits to operate legally. Check with local municipalities and industry associations for requirements.

Get a Business Number (BN)

A Business Number (BN) is a unique nine-digit identifier from the Canada Revenue Agency (CRA) to businesses and organizations for tax purposes. The BN is used for various accounts, such as GST/HST, payroll, import/export, and corporate income tax. Here’s how to get your BN:

1. Register online: Use the CRA's Business Registration Online service to apply for a BN. This is the quickest and easiest method.

2. Register by mail or phone: If you prefer, you can register by mail using Form RC1, "Request for a Business Number," or by calling the CRA Business Enquiries line.

3. Activate program accounts: Depending on your business activities, you may need to activate additional program accounts linked to your BN, such as GST/HST, payroll deductions, or import/export accounts.

Open a business bank account

Opening a business bank account is essential for managing your finances, separating personal and business expenses, and establishing your business's financial credibility. Here are the steps to open a business bank account:

1. Choose a bank: Research and compare different banks to find the one that offers the best services and fees for your business needs.

2. Prepare required documentation: Gather necessary documents, such as your business registration documents, Business Number (BN), and identification for all signatories.

3. Visit the bank: Schedule an appointment with a business banking advisor at your chosen bank. They will guide you through the process and help you choose the right account type.

4. Deposit initial funds: Some banks may require an initial deposit to open the account. Be prepared to fund the account as needed.

5. Set up online banking: Enroll in online banking to manage your account, make transactions, and monitor your finances conveniently.

Building business credit

Apply for a business credit card

Applying for a business credit card is one of the first steps in building business credit. A business credit card can help separate your personal and business expenses, making it easier to manage your finances and establish a credit history for your business.

• Choose the right card: Research and compare different business credit cards to find one that suits your needs. Look for low interest rates, rewards programs, and favourable terms.

• Check eligibility requirements: Ensure you meet the eligibility requirements for the card you want to apply for. This typically includes having a registered business and a Business Number (BN).

• Apply for the card: Complete the application process, providing necessary information about your business and personal credit history. Approval criteria may vary, so be prepared to provide financial statements or other supporting documents.

• Use the card responsibly: Once approved, use your business credit card for regular business expenses, and make sure to pay the balance in full each month to avoid interest charges and build a positive credit history.

Keep your credit utilization low

Credit utilization is a key factor in how credit scores are calculated. It refers to the ratio of your current credit balances to your total available credit. Keeping your credit utilization low demonstrates responsible credit management and can positively impact your credit score.

• Monitor your credit limits: Regularly check your credit card and line of credit limits to ensure you are not approaching the maximum allowed.

• Spend wisely: Only charge what you can afford to pay off in full each month. Avoid maxing out your credit cards, as high balances can negatively affect your credit score.

• Request credit limit increases: If your business expenses increase, consider requesting a higher credit limit from your lender. It can help lower your credit utilization ratio if you maintain your spending levels.

• Use multiple credit accounts: Diversify your credit usage across accounts instead of relying on a single credit card. It can help spread out your expenses and keep individual account balances low.

Make on-time payments to vendors and suppliers

Timely payments to vendors and suppliers are crucial for building and maintaining a strong business credit profile. Consistently paying your bills on time shows that your business is reliable and financially responsible.

• Set up repayment reminders: Use calendar alerts, accounting software, or banking services to set up payment reminders for all your bills and invoices. This helps you stay organized and avoid missing due dates.

• Negotiate payment terms: When establishing relationships with new suppliers, negotiate favourable payment terms that align with your cash flow. Longer payment terms can provide more flexibility to manage your finances.

• Automate payments: Whenever possible, set up automatic payments for recurring bills to ensure they are paid on time. It reduces the risk of late payments due to oversight.

• Maintain good relationships: Building strong relationships with your vendors and suppliers can be beneficial. If you encounter cash flow issues, they may be more willing to accommodate you with flexible payment arrangements.

• Track your credit report: Regularly review your business credit report to ensure that all payments are accurately recorded. Dispute any discrepancies promptly to maintain the accuracy of your credit profile.

Benefits of a good business credit score

Easier access to financing

A strong business credit profile allows you to qualify for lower interest rates on a line of credit or loan. This reduces the cost of borrowing and frees up capital for other business needs. Lenders are more likely to offer higher credit limits to businesses with good credit. This provides greater financial flexibility and the ability to fund larger projects or expansions.

Improved supplier relationships

Suppliers are more willing to extend trade credit to businesses with good credit, allowing you to purchase goods and services on account and pay for them later. A good business credit profile gives you leverage to negotiate better payment terms, discounts, and pricing with suppliers, reducing overall costs.

Enhanced business opportunities

Investors and venture capitalists often consider a business’s creditworthiness when making investment decisions. A good credit score can make your business more attractive to potential investors and enhance your reputation and credibility, facilitating access to funding for growth and expansion.

Lower insurance premiums

Insurers may use your business credit score to determine premiums for business insurance policies. A good credit score can lead to lower insurance costs, providing savings that can be reinvested in your business.

Business stability and growth

Good business credit provides financial flexibility to manage unexpected expenses, take advantage of new opportunities, and navigate economic downturns. Lower borrowing costs and improved cash flow enable you to reinvest more profits into your business, driving growth and innovation.

Personal liability protection

Building strong business credit helps separate your personal and business finances. This reduces personal liability and protects your personal assets from business-related debts and obligations.

Employee recruitment and retention

With better access to financing and improved cash flow, you can offer competitive salaries and benefits, attracting and retaining top talent.

Peace of mind

Knowing your business has a strong credit profile provides peace of mind, allowing you to focus on strategic planning and long-term goals without worrying about financial constraints.

Establish business credit with KOHO

KOHO’s enterprise solutions provide businesses with innovative solutions to streamline their corporate finances. From business prepaid cards and payment ecosystems to credit and lending tools, KOHO can help you keep your corporate finances organized and efficient.

We help boost your credit and build credit for your business to qualify for better terms on loans and other financing products. For individuals, you can explore options like overdraft protection coverage for emergencies or high-interest savings accounts with competitive rates. Reach out to us today to learn about how we can help with your enterprise's financial needs.