New businesses face the same challenge as young adults. They have no official track record in managing money, so lenders are cautious about dealing with them. This means that both new businesses and young adults need to make it a priority to build a good credit score. Here is an in-depth guide to help.

What is a credit score?

In practical terms, a credit score is a measure of a person’s/company’s perceived ability to manage credit. There is no government-mandated system for determining a credit score. Instead, credit bureaus and lenders run their own systems to their own rules. The exact rules are a closely-guarded secret, but the general principles behind them are widely known.


The key components in a business credit score are:

  • Company information and history
  • Financial performance
  • Credit utilization and payment history

Company information and history

There is virtually nothing you can do to influence your company's information and history. You should, however, make sure that you’ve checked all administrative boxes like getting your Business Identification Number.

Financial performance

You will, of course, be doing everything you can to influence your company’s financial performance. This is, however, likely to be a long, slow process as your company goes through the natural business cycle of start-up, fledgling and mature company.

Credit utilization and payment history

This is almost always the easiest and quickest win. In simple terms, as soon as you can get any line of credit, however small, you can work on establishing your responsible credit utilization and payment history.

What is considered a good business credit score?

In Canada, the business credit-scoring system tends to run between 0 and 100. There are, however, variations on this. For example, Equifax (one of Canada’s nationwide credit bureaus) issues three credit scores using scales of 0-100 (payment index), 100-992 (credit risk) and 1000-1880 (business failure).

Higher credit scores are better credit scores

Whatever scale you’re using, higher scores are better. Basically aim to hit the top 30% as soon as possible and then push for the top 20%. For example, on the standard 0-100 scale, you should be aiming to hit 70 in short order and then do whatever you can to push this up to 80 (or at least 75).

Lower credit scores are not the end of the world

That said, lower business credit scores do not have to be a disaster for your business finance. You may be able to leverage a good personal credit score and a personal guarantee to get financing for your business.

Personal credit scores can be very useful in business

In Canada, personal credit scores are generally calculated on a scale of 300 to 900. As a rule of thumb, you want to have a minimum credit score of 660. Per the previous comments, higher is better. Credit scores in the 725-759 range are generally considered very good and once you get to 760+ then your credit score is likely to be considered excellent. 

Why is a good credit score important for small business owners?

A good credit score is important for small business owners for the same reason as it’s important for private individuals. It will influence your ability to get credit. Remember that “credit” means more than just business loans. It can also mean the ability to pay for goods and services in arrears instead of in advance. In other words, a good credit score can do a lot for your cash flow.


It is also a validation of your ability to manage your money. It can therefore be a useful selling point in certain situations. For example, it can be used to show investors that you act responsibly with other people’s money.  


A good credit score can be used to show potential employees that they can feasibly expect to get paid from one month to the next for as long as they stay with the company. In fact, it can be used to reassure current employees and to stop them from “jumping ship” to maintain their financial security.


Last but definitely not least, if a business has a good credit score in its own right, it will be less likely to need to rely on its owners’ personal credit scores and/or their ability to make personal guarantees. This is fundamental to realizing one of the main benefits of incorporation, namely the ability to separate the company’s finances from its owners’ finances. It’s also vital to ensuring that the company can survive after its owners move on (which they eventually will).

How to build your business credit: step-by-step

There are basically three key steps you need to take to build your business credit. These are: take care of the necessary admin, manage your own credit control effectively and use credit little and often. Here are the steps to follow.

Steps to build your credit score

The good news for new business owners is that a lot of the work of establishing a business credit score is actually a matter of basic administration.

  1. 1
    Start by getting a business bank account

You should apply for a business bank account as soon as your incorporation is confirmed. Ideally, you also want a business credit card. It doesn’t really matter how low the credit limit is. You simply want it to show that you can use credit responsibly.

  1. 2
    Make sure you manage your own credit control effectively

One of the most fundamental practicalities of business is that you can only pay your bills if your customers pay you. This means that you really need to stay on top of your own credit control.

If you collect payment in arrears


Make sure that you have robust invoicing systems in place so that invoices go out as they should. This means to the right people, for the right amount and with all the details necessary for the customer to make payment.


The payment terms you offer will probably be dictated by the established standard in your industry. There is, however, nothing to stop you from taking steps to try to motivate customers to pay more quickly. If you can’t afford to offer a discount for prompt payment then you could try running a monthly prize draw for people who pay quickly. This could be much lower-cost but still have the desired effect.


If you collect payment in advance


Always remember that advance payments can be revoked. Even if you only take payment in cash, customers can still ask for a refund. Depending on the circumstances, you may be legally obliged to give them one. If you take non-cash payments, e.g. payment cards, ewallets and such like, then you will have to work to their scheme rules as well as local laws.  


Make sure you understand both the law and payment-scheme rules


The law will apply regardless of how your customers pay. Payment-scheme rules will depend on what payment scheme(s) you use. You can expect them to include details on the circumstances in which customers can request refunds through the scheme and the time limits for doing so. It’s important to familiarize yourself with these and, in particular, look at what you can do to defend yourself against any complaints you feel are unreasonable.


Do as much as you can to minimize returns and refunds


The best approach, however, is to ward off requests for returns and refunds in the first place. The best way to do so is to make sure that people are provided with full, complete and accurate information before they decide whether or not to make a purchase. After all, it’s better for both them and you that they don’t purchase at all than that they buy something, decide it’s not right for them and then return it.


Make sure your customers are well informed before they make a purchase


In particular, think carefully about why people might buy your product or service and make sure that key information for the buying decision is easily accessible to them. For example, if you’re selling clothes, link directly to the page with your sizing information and have it open in a separate window so customers can easily refer to it while they are browsing. Do not just refer them to your sizing page for further information.


Keep track of returns/refunds


Every time a customer returns an item or requests a refund, you need to know why. You can then use this information to see if there’s anything you can do to stop you from getting another return/refund request for the same reason.  

  1. 3
    Use small amounts of credit often

You want to build up a track record of paying back credit. For this to happen you need to use credit as much as you can. If there is an interest charge to pay, then you will have to weigh up the pros and cons of the extra cost. If, however, you can get interest-free finance or, at least, an interest-free period, then it is likely to be to your advantage to use credit even if you have the funds to make the purchase outright.

  1. 4
    Make sure you have adequate insurance cover

This may seem like an odd comment in an article about building business credit.  It is, however, very important.  Essentially, you want to avoid any situation which could either take you close to (or, worse still over) your credit limit or force you to pay it off in instalments rather than paying off the entire balance each month.  Having the right insurance in place can protect you from the sort of unexpected events that could otherwise put you into exactly that situation.

  1. 5
    Manage your business credit cards effectively

This may seem like an odd comment in an article about building business credit.  It is, however, very important.  Essentially, you want to avoid any situation which could either take you close to (or, worse still over) your credit limit or force you to pay it off in instalments rather than paying off the entire balance each month.  Having the right insurance in place can protect you from the sort of unexpected events that could otherwise put you into exactly that situation.

  1. 6
    Lay down clear policies for the use of your business credit cards

As an absolute minimum, you need to make it abundantly clear that business credit cards are to be used for business-related purchases only. There are three reasons for this. The first is to prevent staff fraud. The second is for general fraud monitoring and the third is to avoid potential legal implications.

Preventing staff fraud


Employee fraud happens, it’s a harsh fact of life. If you don’t like to think badly of your employees, then just say that mistakes can happen. Putting clear policies in place regarding how your business credit card is to be used can put a stop to both.


Fraud monitoring


Activity on business credit cards will be monitored in much the same way as activity on consumer credit cards. In simple terms, your card issuer will look to understand your regular pattern of behaviour. They will then use this as a baseline for what they should expect from you and hence what they should not expect from you, in other words, what could be fraudulent activity.

If your staff mix business purchases with consumer purchases, then it will be more difficult for your card issuer to understand their behaviour. This could make it more difficult for them to identify potential fraud.


Legal implications


In simple terms, any activity on your business credit cards is connected to your business. This means that if your staff use your business cards inappropriately, even unintentionally, it may come back to bite you. Your first line of defence against this is to have clear and understandable policies about how your business card is to be used. Your second line of defence against this is to verify adherence to those policies.

  1. 7
    Verify adherence to those policies

You may be able to restrict some activities by blocking cards from being used for certain purchases. This approach does, however, need to be used with caution so that it does not result in staff being unable to make genuine purchases with their business credit cards.


Even if you do use automatic blocking, it is still advisable to check card usage manually. Ideally, this should be done every month. Statements should be backed up with receipts and both should be double-checked against company policy.


If you discover instances of non-adherence to company policy then you must take action. Ideally, that action should be in accordance with the information set out in the usage policy which you will already have issued to staff. If it isn’t, then you may want to consider updating the policy and drawing the update to the attention of staff, then taking further action if the breach happens again.

How to establish business credit fast

There are two steps to building business credit fast. The first is to make sure that you use business credit for business purchases (and only for business purchases). The second is to use as much credit as you possibly can without making it look like you’re dependent on it.

  • Always use business credit for business purchases

When you open a new business, there is a distinct possibility that you will need to leverage your personal credit history to get some level of business credit. If, however, you keep using personal credit for business purchases, then those business purchases will be reflected on your personal credit score not your business credit score.  


You, therefore, need to focus on weaning your business off its reliance on personal credit scores and personal guarantees. The only way to do this is to have your business use credit in its own right. This means that, even if it’s less convenient, you need to stick to using business finance for business purchases and only business purchases - no exceptions.  


Likewise, you should stick to using personal finance for personal purchases (and only personal purchases). The only potential exception to this is if a business really needs something which can only be bought with the use of personal finance/a personal credit score. In that case, the individual should make a formal loan to the business.

  • Use business credit as much as you reasonably can

In blunt terms, you want to look motivated, not desperate. This means that you should aim to use credit as much and as often as you can without skating close to your credit limit. Aim to stay at least 20% below it, 30% is better. When your bill comes due, pay it off in full and on time or, better still, immediately.

How to build business credit with bad personal credit

Building business with bad personal credit can be tricky, but it is definitely not impossible. There are three main approaches to going about it. Firstly, you can improve your personal credit. Secondly, you can use a guarantor and/or leverage someone else’s personal credit rating. Thirdly, you could look at alternative/niche financing options.

  • Improving your personal credit

Given that your personal credit score is likely to play a major role in your life, it never hurts to check that it’s as good as it can be. If it isn’t it never hurts to do what you can to improve it. Here are some tips.


Make sure that there are no errors on your personal credit report


Mistakes happen, but they can often be corrected if you let the credit bureau know.


See if you can take action to remove any historic “black marks”


On a similar note, if a company has placed a negative flag on your credit record, try contacting them and see if you can negotiate a way to have it removed.


Close any unused lines of credit


If you have credit lines you are not using, for example, credit cards gathering dust in your wallet, then close them. Similarly, if you have accounts with small balances, then make it a priority to pay off the balances and close them. If you really want to keep the accounts open “just in case”, then at least lower the credit limit as much as you feel you comfortably can.

  • Use a guarantor or leverage someone else’s personal credit rating

If you can’t improve your own personal credit rating quickly enough, you can try using a guarantor and/or leveraging someone else’s personal credit rating. You may want to think carefully about this option because it could involve giving them a stake in your business. If it does then you’re going to need to define their role and formalize that definition legally. You’ll also need to lay out an exit strategy for them.

  • Look at alternative/niche financing options

Try enlisting the help of a business loan broker to see if there are alternative/niche lenders out there who might be interested in you. Even if you really can’t get standard business finance of any description, there may be other options such as peer-to-peer loans and venture capital. This could help to get you started and potentially be enough to get your business a very small line of credit to start establishing its own credit record.

How to check your business credit score

There are four national credit bureaus in Canada. They are Dun & Bradstreet, Equifax, Experian and TransUnion. The easiest way to check your business credit score is just to go to their websites and request a copy of the reports they have on your company. As there is no consumer protection for companies, you just have to enter the relevant details and pay the fee.

How to check business credit score for free

Sadly, Canada does not have a great range of options when it comes to checking a business credit score for free. There is, however, a service called Creditsafe, which offers a free trial, after which you can cancel. This is powered by Equifax


About the author 

Maurice

Maurice (Moe) Muise learned the ins-and-outs of government while an employee of the Government of Canada in Ottawa for 10 years. His current focus is helping small businesses in Ontario to identify and maximize government grants to grow their business.
Click here to learn more about Moe's background and how he can help your business.

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