Just as you have a personal credit score that describes your financial history and a potential risk to creditors, your business may have its own separate credit score. However, some companies don’t take the necessary steps to build business credit early on, which can impact their ability to get financing and take other necessary steps to grow.
If you want to learn how to build business credit fast so you can get a loan or perform other essential functions, here’s a guide that can help.
Why You Need to Establish Business Credit
A strong business credit rating can increase your access to financing, give you better APR interest rates, allow you to access favorable terms in relationships with vendors, and reduce cash flow issues since you won’t need to pre-pay for as many purchases.
Let’s take the example of Sally, a marketing consultant. Up until this point, Sally has run her business as a sole proprietorship — mainly from home. She hasn’t needed financing or loans, so she’s mainly used her own personal credit cards and bank accounts to purchase supplies and run her business. Now, she’s ready to grow her business with an official office and team, but her company doesn’t have a business credit history to speak of. Here are some steps that can help Sally, and you, create a strong business credit score quickly.
7 Steps to Build Business Credit
As with personal credit, there are multiple credit bureaus that measure business credit. Most of them take similar factors into account, like your ability to pay bills on time, your debt to credit ratio, business history, and industry risk.
Below we show you the proven techniques to establish a credit history for your small business and put it on a favorable financial footing. Follow these 7 steps to build your business credit:
1. Establish a Separate Business Identity
Credit bureaus can’t track your payment history if they’re not aware that your company exists. While Sally was purchasing supplies and software for her company under her personal name, those purchases didn’t build her business credit history. Here are some things you can do to alert credit bureaus of your existence so they can start tracking your financial history and risk.
- Set up corporation or LLC — If you run your business as a sole proprietorship, like Sally, your business credit is tied to your personal credit. Creating a separate business entity makes it clear that your personal and business credit and finances are separate. Specifically, the credit bureau Dun & Bradstreet recommends incorporating or setting up an LLC.
- Get an Employer Identification Number / EIN — An EIN (employer identification number) is basically a Social Security Number for your business. It’s free to get one from the IRS, and you’re required to have one if you have employees or if you’re taxed as a C corporation or LLC.
- Obtain a DUNS number — A DUNS number is another identifier used to track businesses. It’s monitored by Dun & Bradstreet, and it’s free to apply for one online. You’ll also need this number if you plan to apply for federal contracts.
- Get a business phone number — A dedicated phone number listed in your company’s name offers extra credibility. You’ll also use it to sign up for a DUNS number and other accounts in your company name, which go towards securing your business credit.
2. Open a Business Checking Account
Many young business owners feel they can get by using bank alternatives like PayPal and Venmo. Or worse, some business owners, like Sally, commingle all their business funds in their personal bank accounts. The problem is that these transactions don’t go toward establishing your business credit with reporting agencies to build your credit.
To rectify this problem, sign up for an official bank account using the name of your business. You can still use services like PayPal and Venmo, but connect them to your business bank account so you’ll have an official record that credit bureaus can track.
3. Obtain a Business Credit Card
A credit card is the easiest form of business credit to get. It will also help you establish a record of repayment, which will build your business credit score. So basically, Sally can sign up for a credit card in her company’s name and start making purchases and payments right away, thus proving to creditors that she has the ability to repay debts.
Make sure you sign up with a credit card company that reports to the main business credit agencies. Citi and Chase are two that do, but you can research your card of choice to make sure. Once you start using your business credit card, you must pay your bills on time or early to avoid late fees and hits to your credit score.
4. Use Vendors that Report to Agencies
Working with vendors that supply equipment or inventory to your business can also help you establish a strong history of paying your bills and honoring agreements with partners. This is yet another way you can build your business credit. However, make sure you choose vendors that actually report to credit bureaus. Some of these include Quill, Grainger, and Uline.
In Sally’s business, she may have simply bought office supplies here and there. But signing up for an account with Quill and making regular payments ensures that her company is building business credit that gets reported to the right agencies.
5. Pay On Time Or Early
When you sign up for business credit cards and vendor agreements, you have to pay your bills on time if you want your business credit score to go up. Paying by the due date is enough for most business credit bureaus. However, Dun & Bradstreet actually rewards companies that pay debts 30 days or more beforehand. Most importantly, avoid any late payments that lead to things like tax liens or judgments against your business, since these can dramatically drop your business credit score.
6. Monitor Your Business Credit Rating
Sometimes, your business credit report may include inaccurate information that can harm your chances of getting approved for a loan or an attractive interest rate. By checking your business credit scores, you can find any misinformation and then contact the credit bureaus in question to have that information corrected or removed. For example, Sally might notice penalties on her credit report for late payments made to a vendor she doesn’t even work with. This may be the result of an error or identity theft, but catching the problem early on can help her avoid more trouble in the future for your business.
Additionally, checking your business credit report can be educational, since it can help you understand what factors you may need to work on. Sally, who pays all her bills exactly on time, may notice that her reports are largely positive, with the exception of Dun & Bradstreet. By learning that she can increase her score by paying early, that small shift can make a big difference going forward to make her business profile stronger.
Most credit bureaus give you the chance to view your credit report once for free or a small fee. Some also let you sign up for alerts so you can see when your account has new activity.
7. Update Public Business Records
Updating and completing your business credit file gives you extra credibility and ensures information about your business is accurate. Different credit agencies offer different levels of access. For example, Dun & Bradstreet offers D-U-N-S Manager, an online platform for you to edit your business information directly. This doesn’t directly impact your credit score, but it can indirectly by ensuring your information is up-to-date so bureaus can easily track your activity.
Likewise, actively monitor and update other public records, including those on Google my Business, Bing Places, Apple Maps, Google Maps, and Yelp. Make sure basic data such as your business address, phone number and business name are correct, especially for your Google My Business listing. This information can get out of date or include other inaccuracies. Additionally, listings with similar names can cause confusion, and some even get defaced by competitors. So keep your online business listings clean and accurate to avoid misinformation impacting your credit score.
Top 8 Credit Mistakes to Avoid
Finally, keep in mind 8 of the most common business credit mistakes that small business owners make that limits their access to capital and growth.
- Over-relying on personal credit — It’s a mistake to rely on personal credit cards or a home equity line of credit for business expansion or cash flow. You may have no choice as a young startup. But as your business matures, that attitude short changes your family and limits the credit you will have available for both business and personal use. By having separate business credit you expand the available funds. You will have personal funds and the business credit limits to tap into, instead of telling the family there’s no vacation this year because your one credit card is maxed out for new office computers. Additionally, if the business runs into trouble, your family home and other personal assets remain separate and won’t be on the hilt.
- Assuming you can’t change anything — You have more power to control your business credit destiny than you think. You can impact it in positive ways, as long as you educate yourself first. That’s why monitoring your business credit report is so important. Find inaccuracies and take the necessary steps to get them removed. And if all the information is correct, look at the factors that are driving down your scores and take positive steps in those areas.
- Neglecting your personal credit score — While the whole point of business credit is to separate it from your personal credit, don’t completely ignore your personal credit rating. Especially for sole proprietors, the two are often connected. Your personal credit rating can bleed over into and affect your ability to obtain a business loan. And some creditors will require that the owner guarantee or be liable along with the business entity in certain borrowing decisions, especially early on. Also, a score like FICO SBSS actually takes into account the owner’s personal credit rating when determining business credit scores.
- Maxing out credit cards — Though a business credit card is a great way to establish payment history, you don’t want to use up all the credit that’s available to you. This creates a negative debt to credit ratio that indicates lots of risk for creditors. When you sign up for a new business credit card, use it for essentials and try to pay it off each month or at least make recurring payments before the due date.
- Opening too many credit accounts at once — As with personal credit, business credit scores can go down when there are a ton of credit inquiries made within a short period of time. This tells creditors that you’re opening tons of new accounts and may increase your debt in a short period of time — or that your financial situation may be worse than it seems. Take out the business credit cards and loans that you need, but avoid going overboard.
- Giving employees too much leeway — You already know that making late payments can have a negative impact on your credit score. However, your employees may be less motivated than you are to protect that score. If you issue business credit cards to team members for expenses, make sure they make payments on time and don’t rack up too much debt. If a business credit card is taken out by your company, it’s likely to have a bigger impact than one with your employee as the primary account holder. However, establishing repayment processes and policies is always a good idea.
- Choosing the wrong loans — Just because your business gets approved for a loan or financing opportunity, that doesn’t mean you should necessarily take it. If the payments are too high, the terms are unreasonable, or the repayment plan is on a timeline that doesn’t suit your business, you may be doing more harm than good. Shop around for the best rates and only go for offers that work for your small business. Making sure you can actually make payments on time and repay the full amount will ultimately benefit your business credit scores more in the long run.
- Waiting too long to start — Waiting until the day before you are ready to apply for a loan to think about your business credit score doesn’t give you enough time to make a meaningful impact. Building business credit before you need to borrow money gives you a better chance of establishing a strong payment history and getting your business credit score to an acceptable level for creditors. Even if you can’t do everything, taking just some of the steps above will better position your company for the future.
Building business credit takes time. However, the steps above include some things you can start right away so you can get your company on the right financial track. Whether you’re thinking about applying for a loan or just want to position your company for potential growth in the future, understanding how to build business credit is the first step in setting your company up for future success.
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