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Running a business

The newcomer entrepreneur's blueprint for building business credit in Canada

Think of business credit as the hidden currency of opportunity — without it, even the most promising ventures can stall. But here's a dilemma many newcomer entrepreneurs face — you need credit to get credit.

So, how can you break into the Canadian financial ecosystem and secure the credit you need to sustain a thriving new business? In this article, you'll learn the actionable steps you can take right now to lay the groundwork for a strong business credit profile — even if you're starting out with a limited personal and business credit history.

The role of personal credit in building business credit

For a new business without a substantial credit history, lenders and financial institutions will typically turn to the owner's personal credit history to gauge the business's creditworthiness and decide whether to extend business credit.

Think of your personal credit score as a mirror reflecting your financial habits — your score shows how responsible you are when it comes to handling money. Since your business won't have its own credit profile yet, your personal credit history is often the deciding factor in obtaining crucial initial funding.

What is a personal credit score?

Your personal credit score is a number between 300 and 900 that represents your history with credit — essentially, it's a snapshot of your financial reliability. You can obtain your credit score from the two major credit bureaus in Canada (Equifax and Transunion). You can also check with your financial institution, as many Canadian banks now provide credit score information to their clients.

Lenders use your credit score to evaluate how likely you are to repay borrowed funds. Your score is calculated based on several factors, such as your payment history, the total amount of debt you have, and even the mix of credit products you hold.

As a newcomer to Canada, it's also important to know that your Canadian credit score starts with a blank slate — it won't reflect your previous credit history in your country of origin.

While this can initially present challenges in obtaining credit, it also gives you a unique opportunity to build a strong personal credit profile from the outset — and a positive credit history can be fundamental for building business credit for your new venture.

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How to build your personal credit score

Building your credit score in Canada from scratch isn't as daunting as it sounds. Here are some effective strategies to get you started:

  • Obtain a credit card. Look for newcomer-friendly credit cards or consider a secured credit card, which requires a security deposit as collateral.
  • Understand the credit utilization ratio. This ratio shows the amount of credit you're using compared to your credit limit. You calculate it by dividing your total credit balances by your total credit limit. Keeping this ratio low has a positive impact on your credit score.
  • Maintain a low credit card balance. Be sure to keep a low balance on your credit card. A good rule of thumb is to use less than 30% of your available limit.
  • Make regular, timely payments. Don't miss any bill payments: Be consistent and make all payments by their due date, as your payment history is a major factor in your credit score.
  • Use different credit products. As your credit improves, aim for a diverse mix of credit. For example, it's better to have a credit card, a car loan, and a line of credit rather than three credit cards.

How to build business credit for your new business

Much like your personal credit reflects your personal financial health, your business credit profile is a key indicator of your new venture's financial health. And your business credit score — which typically ranges from 0 to 100, depending on the credit bureau maintaining the score — is a snapshot of your company's reliability in managing its finances.

Think of your business credit score as a fiscal report card that lenders and suppliers can review to evaluate your business's creditworthiness. A higher score is a clear signal of your business's ability to handle its financial commitments responsibly. It shows a history of sound financial decisions and timely payments that essentially tells lenders, “This business keeps its promises."

To help your new business live up to this promise, the following are some actionable strategies for building and maintaining a strong business credit profile.

Set up your business

Properly setting up your business is essential for building business credit in Canada:

  • Register your business. Whether you're setting up shop as a sole proprietorship, partnership, or corporation, it's important to comply with any legal requirements. These will vary depending on your province/territory and your municipality and may include forming your business, registering your business name and obtaining any required permits and licenses.
  • Obtain a business number. A business number is crucial for tax purposes, including GST/HST registration, and serves as your business's official identification number.
  • Open a business bank account. Opening a separate bank account for your business separates your personal and business finances, simplifying your accounting and reinforcing your business's financial credibility.

Obtain a business credit card

A business credit card is useful for more than just paying expenses — it's an important tool for building a solid business credit history. When selecting a card, consider factors such as interest rates, credit limits, and rewards programs. Remember that responsible use of a business credit card, including timely payments and keeping balances low, is key to building a positive credit reputation.

Pay invoices and bills on time

Much like your personal credit history, being consistent in paying your invoices and bills on time is key for new businesses working to establish a good credit score. A record of regular, on-time payments is a clear indicator of your business's financial responsibility — plus, it's a track record that can lead to more favourable terms from lenders and suppliers. Consider setting up automated payments to ensure you meet this crucial aspect of credit building.

Establish trade credit

Your business needs suppliers — so partnering with ones that regularly report payment history to credit bureaus can be an effective way to boost your business credit score. Many mobile phone providers, for example, routinely report to credit bureaus. And if you're working with a supplier that doesn't normally report payments? Don't hesitate to ask them to do so. Each reported payment adds a layer of credibility to your business credit report.

Keep tabs on your business credit reports

Conducting regular reviews of your business credit reports — which you can obtain from Equifax, Transunion, or Dun & Bradstreet — allows you to track your credit standing, identify trends, and spot opportunities for improvement. It's also essential for detecting and addressing any discrepancies or errors, which can be crucial for maintaining your business's credit integrity.

By taking actionable steps to build your business credit, you're not just establishing and maintaining a robust credit score for your business, you're building the financial foundation your venture needs to succeed.

Establishing a strong business credit profile is closely tied to how well you manage your financial records. QuickBooks Online's automated expense tracking and categorization features can support your credit-building strategy by streamlining your financial processes and ensuring consistently accurate records.

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