Building business credit is an essential step to giving your business the credibility it needs to access lines of credit and loans in the future. Establishing business credit can benefit your small business in many ways. Strong business credit can make it easier or less expensive to get certain types of financing, business insurance, or payment terms with suppliers. It can even help your business land lucrative business contracts. Our little guide on how to establish a business credit would show you some essential steps to follow in building a business credit for your business:
1. Incorporate your business
Business owners must form an LLC or corporation because business credit can only be attached to a legal business entity. This is because other business structures have no legal separation between the owner and the business. When there isn’t any legal separation, only the business owner’s personal credit and SSN can be used to apply for loans, etc.
Therefore, there can be no separation of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s).
2. Get an Employer Identification Number (EIN):
An EIN (federal tax identification number) is basically a social security number for a business. It is required on federal tax filings and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.
3. Open a business bank account
Setting up a business checking account allows you to separate your business revenue and expenses from personal income and this gives you more credibility in the eyes of financial institutions. Your business bank account can also be used to get a secured business credit card and help you get a business loan in the future. Most lending institutions will require 6 months of statements from your business bank account to assess your creditworthiness for a loan.
4. Get a DUNS Number
A DUNS number is a unique nine-digit identifier obtained through Dun & Bradstreet. This number identifies your business as separate from every other business around the world. This is the number creditors use to look up your business credit file to find your credit history.
5. Obtain business credit card(s)
Opening a business credit card that reports to the major commercial credit reporting agencies is a great way to establish business credit. You can benefit from perks such as cash back or travel rewards, but you can also use one of these cards to build credit. Most small business credit card issuers will use the owner’s personal credit scores and income from all sources to determine if you qualify. That means they are available to startups as well as established businesses.
You definitely should have at least one open business card if you qualify, but more than one can also help. That way, you may be able to access a higher credit limit to increase cash flow.
6. Establish a line of credit with vendors or suppliers
Work with multiple vendors/or suppliers (at least five for example) to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies.
7. Pay your bills on time
Perhaps it should go unsaid, but be sure to pay your bills on time. Payment history is the most important factor for any type of credit scores, and especially so for business credit. Business credit reports use a term called, “Days Beyond Terms” (DBT) that describe how many days beyond the due date a payment was made. Like with your personal credit, late payments will negatively impact your business credit. If you’re just starting out with your new business, establishing good business credit can unlock doors to help you and your business succeed. There are several ways you can establish credit for your business, and it’s important to implement all of them to build as strong a credit profile as possible.