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Understanding how to build business credit can be crucial to running a successful enterprise.
Whether you’re a seasoned small-business owner or just starting, establishing strong business credit can open doors to better financing options, favorable payment terms, and increased business opportunities. However, it’s not uncommon to face challenges, especially dealing with bad credit.
This guide will walk you through nine essential steps to help you build business credit effectively, setting your business on the path to financial success.
How can you build business credit?
Building business credit will involve completing a series of actions. Here are the essential steps and a breakdown of what they’ll entail:
1. Choose the right business structure.
The main types of business structures are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Sole proprietorships and partnerships are simpler to set up, but they don’t separate your personal credit history from your business. This means your personal assets could be at risk if your business incurs debt or is sued.
On the other hand, LLCs and corporations offer a degree of personal liability protection because they are separate legal entities. This means your business’s financial dealings won’t impact your personal credit report.
However, these structures can be more complex and expensive to set up and run.
When choosing a structure, consider your business needs, the level of control you want, the type of liability you’re willing to assume, and the tax implications of each structure. A consultation with a business advisor or attorney could be beneficial.
2. Register your business and obtain an EIN.
Registering your business is a critical step in establishing your company’s identity. It involves registering your business name and obtaining an employer identification number (EIN) from the Internal Revenue Service (IRS).
An EIN is like a Social Security number for your business. The IRS uses it to identify your business for tax purposes, and it’s also required to apply for business credit.
To register your business, you must choose a unique business name that complies with your state’s business naming rules. Then, file the necessary paperwork with your state’s secretary of state office and pay the required fees.
To get an EIN, apply online on the IRS website. The process can be free and relatively straightforward. You’ll need to provide some basic information about your business and yourself.
Once you get an EIN, you can use it to open a business bank account, apply for business licenses and permits, and apply for business credit.
3. Apply for a DUNS number.
A Data Universal Numbering System (DUNS) number is a unique nine-digit identifier issued by Dun & Bradstreet (D&B), a major business credit reporting agency. Applying for a DUNS number can be crucial in establishing business credit.
The DUNS number is used by many lenders, suppliers, and potential business partners to check the creditworthiness of a business. It allows them to access your business credit report, which contains information about your business’s credit history and financial health.
Applying for a DUNS number is free and can be done online through the D&B website. You’ll have to provide information about your business, including your legal name, physical address, and phone number. After applying, it can take up to 30 days to receive your DUNS number.
4. Get a business credit card and bank account.
One of the easiest ways to start building business credit is to open a business bank account and get a business credit card. A business bank account not only helps you keep your personal and business finances separate but also gives your business a sense of credibility.
You’ll need your EIN and other business-related documents when opening a business bank account. Once your account is open, use it to handle all your business transactions, including income and expenses.Using a business credit card responsibly, such as making purchases and paying off the balance on time, can help build your business credit score.
Many card issuers offer perks such as cashback or rewards programs for cardholders, which can significantly benefit a small business owner. These rewards may come as discounts on travel, office supplies, or other business-related expenses. Remember to choose a card with a credit limit and terms that suit your business needs and financial situation.
5. Set up trade lines with suppliers.
Establishing trade lines with suppliers or vendors can be another excellent way to build credit. A trade line is a credit line provided by a supplier that allows you to purchase goods or services now and pay for them later.
Not all suppliers report to business credit bureaus, so choosing those who do can be essential. Ask your suppliers if they report payment history to credit bureaus — if they don’t, consider looking for ones that do.
Once you’ve set up trade lines, ensure you make your payments on time or before schedule. This positive payment history will be reported to the business credit bureaus and can help boost your business credit score.
6. Pay your creditors ahead of schedule.
Paying your creditors ahead of schedule can be a proactive approach to building a positive credit history. Unlike personal credit, which aims to pay by the due date, with business credit, the earlier you pay, the better your credit score.
For instance, the Dun & Bradstreet PAYDEX score, a common business credit score, heavily weighs early payments. A business that pays its bills before the due date can achieve a higher score, leading to better credit terms from lenders and suppliers.
7. Ensure your creditors report to credit bureaus.
It’s vital to ensure that your creditors, including credit card issuers and suppliers, report your payment activities to the major business credit bureaus — Experian, Equifax, and Dun & Bradstreet.
Unfortunately, not all creditors report to these bureaus. Therefore, it’s your responsibility to confirm with each of your creditors that they do.
If you find out that some of your creditors don’t report to credit bureaus, you might want to consider switching to those that do to ensure your positive payment behavior is being recognized.
Timely payment of your debts can be crucial in building credit, but it only helps if the payments are being reported. This is the primary way the credit bureaus will know that your business is a good credit risk.
8. Avoid judgments, liens, and bankruptcies.
Negative financial events, such as judgments, liens, and bankruptcies, can severely impact your business credit score.
Avoiding these events whenever possible may be vital to maintain good business credit.
- Judgments: A judgment occurs when a court rules against you in a lawsuit, which can significantly hurt your business credit. To avoid judgments, address any legal disputes promptly and seek professional legal advice when necessary.
- Liens: A lien is a claim made by a creditor on your assets as collateral for a debt. If your business defaults on a debt, the creditor can seize your assets to recover their money. To avoid liens, pay your debts on time, and work with creditors to negotiate payment terms if you’re struggling.
- Bankruptcies: Filing for bankruptcy is a last resort for businesses facing severe financial difficulties. Bankruptcies can stay on your business credit report for up to ten years, making it challenging to secure financing in the future. To avoid bankruptcy, seek financial advice from professionals, such as accountants or the Small Business Administration (SBA), and explore alternative financing options before considering bankruptcy.
9. Keep an eye on your business credit reports.
Regularly monitoring your business credit reports can be essential for maintaining good business credit. By staying on top of your credit reports, you can quickly identify any errors, discrepancies, or signs of fraudulent activity that could harm your credit score.
Here are some tips to help you effectively monitor your business credit reports:
- Regularly obtain your business credit reports from the major business credit bureaus (Dun & Bradstreet, Experian, and Equifax) or a reputable credit score app (Credit Karma, Aura, Self, myFICO, Mint, Credit Sesame, and Experian). Some bureaus may offer free reports, while others may charge a fee.
- Review your reports carefully and look for any inaccuracies or inconsistencies. Pay attention to details like your business name, address, and ID number.
- Contact the credit bureau immediately if you find errors and provide documentation to support your claim. The bureau should investigate and correct any inaccuracies within a reasonable timeframe.
- Consider signing up for credit monitoring services. These services can alert you to changes in your credit report, such as new inquiries, late payments, or potential fraud. You can address issues promptly and maintain a healthy business credit score by receiving timely notifications.
Why is business credit essential?
Business credit plays a critical role in a company’s ability to grow and prosper. It’s an essential tool for small businesses, startups, and established corporations.
Here are a few reasons why business credit is important:
Business credit helps you secure less expensive financing and better terms.
Establishing good business credit can open the door to less expensive financing options. Lenders, including banks and credit card companies like Chase and American Express, often assess a business’s credit score to assess its creditworthiness.
Businesses with good credit scores are more likely to secure loans with lower interest rates and better repayment terms. This, in turn, improves cash flow and reduces the cost of capital.
Business credit facilitates the separation of personal and business assets.
Using personal finances for business expenses can create a financial mess. It can also expose a business owner’s personal assets to business liabilities — especially in the case of a sole proprietorship.
Establishing business credit helps create a clear separation between personal and business finances. This separation can be even more pronounced in a limited liability company or a partnership.
Business credit can support the financial stability of your business.
A solid business credit profile can boost your business’s financial stability. It can help a company secure a line of credit to manage cash flow fluctuations or get a small business loan for expansion.
Moreover, some providers and vendors extend trade credit based on your business credit, which can help manage your business’s cash flow more effectively.
How does business credit work?
Business credit works similarly to personal credit but is tied to your business’s Employer Identification Number (EIN) or Tax ID rather than your Social Security number.
To establish business credit, you must register with the IRS and obtain an EIN. Then, register your business with business credit bureaus such as Dun & Bradstreet, Experian, and Equifax.
To build your business credit score, you need to open a business bank account in your registered business name, secure a small business credit card and start making business purchases. Make payments on time, as payment history significantly impacts your credit score.
Business credit scores are also affected by the type of business entity, the length of credit history, the number of recent credit inquiries, and credit utilization. Unlike consumer credit, business credit information can be accessed publicly.
Does your personal credit impact your business credit?
While business and personal credit are separate, there can be some overlap, especially for new businesses or sole proprietors.
When you’re starting a business, lenders might look at your personal credit score because your business doesn’t have its own credit history. This is especially common when applying for a small-business loan or a small-business credit card.
However, as your business establishes its credit profile, the impact of your personal credit on your business credit should decrease. Keeping both in good health is essential, as some lenders may check both for certain credit applications.
Start building business credit today.
Building business credit is an ongoing process, but the sooner you start, the better. Strong business credit can give your business better access to funding, lower interest rates, and increased trust from suppliers and lenders.
It can also separate your personal finances from your business, shielding your personal credit from potential business risks. Even if you’re dealing with bad credit, following these nine steps can help you build business credit and improve your financial situation.
Remember, every business journey is unique. While building business credit might take time, its benefits are worth the effort. So start today and set your business up for long-term success.
To learn more about business credit and other financial topics, check out Entrepreneur’s other articles today.