Whether you’re launching a startup or already managing a small organization, understanding how to build business credit is a crucial aspect of your company’s financial health. A robust profile can open doors to various financing options, better loan terms, and advantageous relationships with suppliers.
Understanding
Before diving into the process of building business credit, it’s essential to grasp what it is. It is like personal credit in that it represents your company’s creditworthiness to potential lenders and suppliers. Just like your personal credit score, your business credit score can affect your ability to secure loans, the interest rates you’re offered, and even the terms your business gets from suppliers. And speaking of personal credit, this should be treated with the same seriousness and attention. Neglecting this —or even ignoring the fact that you have business credit—can have a very negative result or impact on your ability to grow.
Step 1: Establish Your Business
Building business credit begins with formally establishing your business. To be seen as a separate entity from you, the business owner, your company needs to be a legal entity. This legal separation protects your personal assets from business liabilities and enables you to start building its own credit history.
Next, obtain a free Employer Identification Number (EIN) from the IRS. This number is essentially a social security number and is required to file tax returns, open bank accounts and establish credit.
Step 2: Register with Credit Bureaus
Business credit scores are maintained by credit bureaus like Dun & Bradstreet, Experian, and Equifax. Consider getting a D-U-N-S number from Dun & Bradstreet, a unique identifier for your business. You can think of these like the personal credit score bureaus, Experian, Equifax and Transunion. Essentially, they operate in similar ways, reporting good payments, late payments and applications for business loans. In addition, This bureaus report financing from investors
Step 3: Open a Business Bank Account
Open a business checking account in your registered business name. Having a separate account for your business not only keeps your accounting clean but also provides another proof point to lenders that your business is a separate entity. To shore up your business and ensure financial security, take this one step further and open up a business savings account at the same time. Note that your business bank may ask to see documentation, such as your Articles of Incorporation.
Step 4: Get a Business Credit Card
Obtain a business credit card from a company that reports to the major credit bureaus. These action provide opportunities to build a credit history. Like with personal credit, you need credit to get credit. However, there are some places that will approve your business for a small credit card and increase the credit line when you make timely payments. Just be sure not to get too far over your head in business debt. Treat it like short term debt, to be paid off in full each month.
Step 5: Establish Trade Lines with Suppliers and Vendors
You can also ask one or more of your vendors if they’ll give you a line of credit. Strive to work with specific suppliers and vendors that offer trade credit — that is, the option to pay several days or weeks after receiving goods or services. Be sure to request that these suppliers report your payments to business credit bureaus, as not all vendors and suppliers do this automatically. Vendors must do a minimum volume of business to be eligible to report the transactions. Having several trade lines in good standing can improve your business credit score.
Step 6: Pay Your Bills on Time
Just like with personal credit, timely payments are critical for maintaining good business credit. In fact, payment history is often the most significant factor on this score. Always aim to pay your bills before their due date to reduce the amount of interest due.
Step 7: Monitor Your Report
Regularly reviewing your business credit report allows you to catch any errors or signs of fraudulent activity. Most credit bureaus offer services that allow you to check your score and monitor changes. Dispute any inaccuracies you find as they can harm your credit.
Step 8: Borrow Responsibly
As you begin to establish credit, it can be tempting to take on more debt than necessary. However, overextending your business can lead to missed payments and damage your credit score. Borrow only what you need, and always have a plan for repayment.
Step 9: Maintain Your Information
As you grows and evolves, ensure that all business information on file with banks, lenders, and credit bureaus is up-to-date. This includes contact information, size of your business, and number of employees. Regular updates ensure your profile accurately represents your business.
Step 10: Diversify Your Credit
Over time, try to establish a mix of credit types. Credit mix often factors into your credit score, and a diverse portfolio demonstrates to lenders that you can manage different types of credit responsibly. Building business credit isn’t an overnight task, but with consistency, diligence, and strategic planning, you can establish a strong profile that benefits you. Contact Santa Monica Accounting for more tips for building and managing business credit effectively.