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Build Business Credit Step By Step:
Business credit is an important part of building a successful business. Without good business credit, your business may struggle to get loans or credit. When you go to scale your business, these lines of credit can be an essential part of financing your growth.
Although it’s important to build business credit, many small business owners don’t understand how to establish and build it. To help you understand, this complete guide will walk you through the steps to establishing, building, and maintaining good business credit.
What is Business Credit?
Business credit is similar to personal credit, except that it’s based on your business’s financial history instead of your own. Instead of basing the credit reports off of an SSN, business credit bureaus use an Employer Identification Number (EIN).
Your business credit number helps banks, credit card companies, and vendors determine whether or not your business is a trustworthy borrower. By loaning to businesses with established credit history, these institutions help minimize their risk.
How does Business Credit Work?
Three reporting agencies (Dun & Bradstreet, Experian, and Equifax) collect information to formulate credit scores for businesses. When you establish an Employer Identification Number (EIN), these agencies collect information to determine your business’s credit score.
All of your business’s financial information is used to formulate these credit scores. Your bank accounts, business credit cards, lines of credit with suppliers, and paid utilities are all used to create your business credit history.
The three reporting bureaus have their own formulas for calculating a business credit score. All three agencies will provide your business with a score between 1 and 100, with higher scores indicating your business has good credit.
Because these agencies each have their own method of calculating your business credit score, your score between them may differ significantly. That means it’s important to actively improve your credit in the eyes of all three bureaus since lenders can draw from any of them to determine your credit.
These credit bureaus use three primary categories to determine your credit:
- Credit: The length of your credit history, your credit utilization, payment history, balance, and trends are all used to determine how your business has used credit in the past.
- Demographic details: Your business size, years in business, and other demographic factors are used to help determine your credit score. Industry risk is also factored in since certain industries prove more financially risky than others.
- Public records: Public information about bankruptcies, judgments, and liens against your business will negatively impact your credit score.
You can build credit by paying your bills early or on time, mixing credit types, and not maxing out your credit limit. Your business’s credit will be hurt by missed or late payments or current judgments against your business. Further detail on how to build business credit can be found below.
Why do I Need Business Credit?
Business credit is an important part of providing for the financial needs of your business. While there are many reasons to improve your business’s credit score, there are three primary benefits of building positive credit:
- Small business financing: Lenders are more likely to provide a loan to your business if your business has a track record of paying its debts. While personal credit can help you secure loans, business credit can help you secure larger loans with better interest rates.
- Relationships with vendors: Your business is more likely to get trade credit if you have a history of paying your bills on time. A good business credit score can help you secure trade credit with good repayment terms.
- Protection for your personal credit: When you make a clear distinction between your business accounts and personal accounts, your personal credit score will not be negatively impacted by your business’s credit. While this protection is especially important if your business fails, it can also make it easier to sell a business and transfer the business history to a new owner.
5 Ways to Establish Business Credit
Many business owners don’t know how to apply for business credit. Especially when your business is new or under a sole proprietorship, establishing business credit can seem like a daunting task.
It’s important to set up business credit as early as possible so your business has a credit history down the road. This credit can help you get loans to pay for business needs.
The five steps below will guide you through the process of applying for business credit.
- Register your business. It’s important to register your business, even if you’re the only employee. You can register as a C-corporation, S-corporation, Limited Liability Company (LLC), or Limited Liability Partnership (LLP).To establish business credit, you need to have a registered business. Incorporating your business or forming an LLC allows creditors to distinguish between your personal credit and your business credit.
A lawyer or business advisor may help determine what business type best fits your business.
- Get an Employer Identification Number (EIN). Getting an Employer Identification Number (EIN) is an essential step to setting up your business credit. The IRS uses an EIN to track businesses for tax purposes. While sole proprietorships, partnerships, and single-owner LLCs can use the owner’s SSN, it’s still a good idea to set up an EIN.An EIN allows creditors to more clearly distinguish between a person’s personal credit and their business’s credit. This number enables business owners to build business credit needed for business financing down the road.
It is free and easy to apply for an EIN on the IRS website. No matter what type of business you have, you can register for an EIN.
- Open a bank account in your business’s name. Opening a business bank account is not just good practice but one that will help establish your business credit. When your business’s finances are completely separate from your personal ones, it becomes easier for credit bureaus to track your credit. Open any business bank accounts in your legal business name and EIN.Use your bank account to pay for business expenses like rent, utilities, a business cell phone, supplies, and more. If your bills are paid in full and on time, you can build positive business credit.
When credit bureaus and lenders look at your credit, they will look to see how long you’ve held business accounts in your business’s name. Accounts held over the course of years prove to lenders that your business is well-established.
- Establish your business’s address and phone number. Make sure your business has an address and phone number separate from your personal address and phone number. Both your business address and phone number should have your company’s name listed and should be paid for with your business accounts.Having these things established allows you to register with business directories. You need both an address and phone number to sign up for directories such as the Better Business Bureau, YP.com, and Angi (formerly Angie’s List). Business directories provide information to credit bureaus, so having complete information on these directories can help you establish business credit.
Additionally, your business’s rent and phone are regular bills that will help you build positive business credit. Even if your business is not in a position to take out a line of credit, your credit can be established by paying these bills early or on time.
- Register for a Data Universal Number System (DUNS) number. Dun & Bradstreet is one of the three business credit bureaus. Their Paydex score is the business credit score used by most suppliers and creditors. Starting a credit file with this company can help your business establish a Paydex score.You can register for a Data Universal Number System (DUNS) number on the Dun & Bradstreet website. This unique, nine-digit code will help track information for your Paydex score. Because it may take up to 30 days to get your number, it’s important to register for a DUNS number as soon as possible.
Although registering for a DUNS number is not required to run a business legally, it’s an important part of building credit for your new business.
7 Ways to Build Business Credit
Once your business credit is established, it’s important to build up good credit. Just like personal credit, building business credit takes time and effort. Below is information on how to build business credit step by step.
These seven steps will help you build a good credit score.
- Establish trade lines with your business’s suppliers. It’s important to establish and keep good relationships with vendors and suppliers. Find suppliers who report your payments to business credit bureaus, as these payments can be used to build a positive credit history.Many suppliers allow businesses to establish trade credit. This lets your business get purchased items before paying for them. When these bills are paid early, or on time, it can be great for your business’s credit score.
Building credit with your business’s suppliers can be a great alternative to taking out traditional loans. Since not all businesses have the credit needed to acquire loans, these business relationships become essential to building credit.
To maximize the benefit to your company’s credit score, you should have various suppliers. When your regular payments are reported to credit bureaus, your business’s credit score can increase.
- Get a business credit card or start a line of business credit. Credit cards and loans are a great way to improve your credit while financing the growth of your business.Business credit cards are helpful for day-to-day purchases for your business. Like bank accounts, these cards can also help differentiate between the business owner’s personal and professional expenses.
To build positive credit with a business credit card, it’s important to pay your bills early or on time. Outstanding balances are not helpful in your quest to build good business credit. If your business doesn’t qualify for regular credit cards, a secured business card can help your business credit until it qualifies for other options.
A business line of credit is similar to a credit card, except the funds are held in a bank account until they’re withdrawn to make business payments. Repaying this line of credit improves your credit score.
As you borrow and repay funds in your business’s name, you’ll build positive business credit.
- Consider leasing equipment. If you don’t have the ability to qualify for a loan in your business’s name, consider leasing equipment. Not only does this allow you to get needed equipment quickly, but it allows you to build business credit.With any leasing agreement, it’s important to make payments on time. It won’t benefit your business to establish a financial obligation that isn’t getting paid.
- Borrow from the right lenders. Your business should borrow from lenders that report to business credit bureaus. It doesn’t benefit your business’s credit score to get a loan from a creditor that doesn’t report your repayment to credit bureaus.Most banks and traditional financing options report to one or more of the credit bureaus. Some online lenders, however, do not report to these institutions. Before applying for a loan, check out the lender’s policies. This can help you maximize the benefit to your credit down the road.
- Keep your business information up to date with credit bureau’s. The three credit bureaus use different scoring systems. Because a lender can pull from any one of them, it’s important to make sure you’re watching your credit score with all three credit bureaus.You should take time to update your information and check your credit report every six months. Update information about your business with each bureau to keep your file as complete as possible. Input information about the number of employees, years in business, financial documentation, address, phone number, and anything else requested by the bureau.
When you check and update your file with each bureau regularly, you can ensure that the bureaus are using accurate information in formulating your business’s credit score. If there are any errors in your credit score, contest them as soon as possible.
A credit monitoring service can be an important part of keeping up-to-date on your business’s credit.
- Be a responsible borrower. Responsible borrowing habits can help you build your business’s credit over time. You should use a mix of business credit options and pay all bills early or on time.A credit utilization ratio is often used to determine your credit score. This compares the amount of credit you’re using to your overall credit limit. For example, if you have $20,000 of your $30,000 credit used, your credit ratio is about 66%.
Generally, businesses should aim to use 30% or less of their available credit. You can request an increase in your line of credit without using it, improving your ration without changing the amount of debt carried by your business.
There are times when your credit utilization ratio will be higher. For example, large purchases can temporarily increase your percentage.
Although increasing your credit limit can help your credit utilization ratio, applying for too much credit in a short period can hurt your credit score. It’s important to space out your business’s credit card and loan applications to prevent a negative impact on your credit score.
One of the most reliable ways to build business credit is by getting credit and paying it off.
- Pay all your bills early or on time. No matter what the bill is, it’s important to make sure all of your bills are paid early or on time. Leased items, bills, utilities, and credit cards must be paid on time every time they’re due in order to build positive business credit.Your early and on-time payments make a significant impact on your business credit. All of the other steps won’t matter if you aren’t keeping up with your business’s bills.
It takes a lot of time and effort to establish and build business credit. However, building this credit is worth it for the future financial health of your business. With a good credit score, your business can acquire the necessary funding to grow or scale your business.
We’re helping clients build better business credit scores with our online resources. Our credit-building tool is the most effective way to build credit for your startup or existing business. To find more information about our services, click here.
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