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Establishing Tier 1 and Tier 2 Business Credit for Small Businesses

For any small business, establishing strong business credit is essential. It not only helps you secure financing but also enables you to build credibility, expand your business, and access better terms with suppliers. In the business credit world, there are typically two tiers: Tier 1 and Tier 2. In this blog, we will explore what these tiers mean and provide some practical tips on how small businesses can establish and improve their business credit to reach these levels.

Understanding Tier 1 and Tier 2 Business Credit

Tier 1 and Tier 2 refer to different levels of business creditworthiness. Here’s what each tier represents:

Tier 1 Business Credit

Tier 1 business credit indicates that your small business has established excellent creditworthiness. This includes having a solid payment history, low credit utilization, and a well-managed credit profile. Tier 1 credit businesses often enjoy lower interest rates, higher credit limits, and more favorable financing options.

Tier 2 Business Credit

Tier 2 business credit signifies that your small business has achieved a moderate level of creditworthiness. While not as exceptional as Tier 1, Tier 2 credit is still considered good, indicating that you manage your credit responsibly. With Tier 2 credit, you can access a decent range of financing options and supplier credit, although the terms might be slightly less favorable than those offered to Tier 1 businesses.

Tips to Establish Tier 1 and Tier 2 Business Credit

Establish Separate Business Accounts

Start by separating your personal and business finances. Create a separate legal entity for your business, such as an LLC or corporation. Open a business bank account and obtain a dedicated business phone line to establish clear lines of distinction between personal and business finances.

Obtain an Employer Identification Number (EIN)

Apply for an EIN from the IRS. This unique identifier allows you to establish credit in your business’s name and is necessary for various credit applications.  You will first need to file for a business license from your state of interest and part of that will be applying for an EIN.

Register with Business Credit Bureaus

Enroll your business with commercial credit reporting agencies such as Dun & Bradstreet, Experian, and Equifax. These bureaus track your business’s credit history and provide credit scores and report that lenders and suppliers use to assess your creditworthiness.

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Build a Strong Payment History

Consistently make payments on time to creditors and suppliers. This demonstrates your reliability and builds a positive credit history. Paying invoices promptly helps elevate your business credit score and move you closer to Tier 1 and Tier 2 credit status.  For business accounts, you will want to pay as early as possible.  Paying your business credit bills close to the due date can actually hurt your overall credit.  You would be seen as “slow to pay”.

Establish Trade Credit

Apply for credit with suppliers who report payment history to business credit bureaus. Building a positive track record with trade credit can help enhance your creditworthiness and pave the way for larger credit opportunities in the future.  Make sure you have your account number for each business credit repository so they are reporting to the correct account.

Monitor and Correct Errors

Regularly monitor your business credit reports for any errors or inaccuracies. If you spot any discrepancies, contact the credit reporting agency to rectify the issue promptly. Correcting errors ensures that your creditworthiness is accurately reflected.

Maintain Low Credit Utilization

Avoid maxing out your credit lines. Aim to use only a small portion of your available credit to maintain a low credit utilization ratio. This demonstrates responsible credit management and helps improve your business credit score.  Try not to go above the 25% threshold.

Gradually Apply for Higher Credit Limits

As your business credit improves, consider applying for higher credit limits on existing accounts. Gradually increasing your credit limits demonstrates that your business is growing and can handle larger credit responsibilities.

Conclusion

Building business credit is a gradual process, but the rewards are significant. By establishing Tier 1 and Tier 2 business credit, small businesses gain access to better financing options, lower interest rates, and improved supplier terms. Follow the tips outlined in this blog, remain diligent in managing your credit, and steadily work towards enhancing your business creditworthiness. With time, patience, and responsible credit practices, your small business can thrive and enjoy the benefits of excellent business credit.

kevin

Kevin Dunlap (#KevinADunlap) has been a serial entrepreneur since starting his first business in 1999. He has been a teacher, network marketer, stuntman (https://www.imdb.com/name/nm0242396/?ref_=fn_al_nm_3), real estate consultant, and Realtor. He has authored four books (https://www.amazon.com/stores/Kevin-A-Dunlap/author/B06XTJQDVB?ref=ap_rdr&isDramIntegrated=true&shoppingPortalEnabled=true) and hosted an international podcast (#LifesLittleLessons). He is now a business coach and strategist for #OptimalPerformanceAcademy. You can schedule a complementary 45-minute discovery session to talk about your business at https://OptimalPerformanceAcademy.org/discovery