Ultimate Guide to Business Credit Building
Are you ready to learn how to build your business’s credit? In this guide you will discover how to efficiently and effectively build your business credit so your company can qualify for better financing options. We’ve helped thousands get funded with less than perfect credit for up to $400,000. Find out how much your business qualifies for instantly online, with no fees or obligations.
After opening a business bank account, business credit building is the second most important task for an entrepreneur to focus on. The sooner you start, the more time you’ll have to develop and maintain a good business credit history. Even though outside financing may not be on the radar now, this will likely change a few years down the road.
Acquiring other companies, purchasing commercial real estate, adding to a fleet of vehicles, and hiring more employees require additional working capital. Taking out a business loan can be a great low-cost option to access the six and seven-figure financing needed to expand business operations. However, a company will need to show proof of strong operating history and high business credit scores to qualify.
What Is Business Credit?
Just like how individuals have credit histories, businesses have credit scores and histories too. Information about a business’s debts and available credit lines are regularly reported to major credit bureaus by lenders. Credit histories are pulled when a company applies for lending, credit lines with suppliers, and other situations that may involve handling finances. Credit bureaus that handle business reporting include Dun & Bradstreet, Experian, and Equifax.
How Does Business Credit Work?
A business’s credit profile is based upon previous financial management and borrowing history. Instead of your social security number, business credit is associated with your business’s EIN.
Business credit scores are separate from personal credit scores and calculated based upon different factors. Even though the two scores are not technically related, many vendors and lenders will still consider both when considering the potential for financing, supply lines, and business deals. Therefore, a business owner should carefully nurture and maintain both credit scores to ensure the best chance for competitive rates and lending options.
Who Needs Business Credit?
A company’s credit profile serves as a snapshot for potential lenders, investors, suppliers, and partners of how much financial risk your business brings to the table. Having access to cash and extra capital can make or break a business. Acquiring additional funds from outside sources of financing can provide an extra layer of security in the event of interruptions in cash flow.
Because credit history takes time to build, every business should develop a track record of responsible borrowing habits early on in their journey. When the time comes to fund expansion activities or purchase additional real estate, qualifying for competitive loans will be much easier.
How to Build Business Credit Quickly
1. Choose the Correct Business Structure
The best type of business structure to form will depend on the industry and the type of business you plan to operate. Choosing between a limited liability company and a corporation will depend on the organizational structure of your business, industry, and desired method of taxation.
For example, a limited liability partnership (LLP) is often preferred for those with professional licenses like attorneys and accountants.
2. Obtain Your Federal Tax ID Number (EIN)
An Employee Identification Number, more commonly referred to as an EIN, is a unique number assigned to businesses for tax purposes. EINs are similar to a social security number for individuals, but only for companies. You’ll need to provide your EIN to open bank accounts, apply for financing and lines of credit, and sign business contracts.
Employee identification numbers are free to obtain and can be requested online through the IRS website.
3. Open a Business Bank Account
The very first thing a small business owner should do after receiving an EIN from the IRS is open a business bank account. Having a bank account in your legal business name is an essential step towards making your business legitimate.
Business expenses should be kept separate from personal spending to protect yourself from unnecessary personal liability and excessive tax nightmares.
4. Establish Credit With Your Vendors & Suppliers
Establishing business credit relationships with two or three vendors and suppliers relevant to your industry provides significant long-term benefits. In addition to deferred payment agreements for supplies and services, many vendors report your payments to the major business credit reporting agencies to help build your business credit history.
Reporting payment history to business credit agencies is not a requirement for vendors and suppliers. Be sure to ask questions about reporting procedures before opening accounts. This will help guarantee all of your contracts are simultaneously helping to build your business credit score. Uline and Quill are two suppliers who offer net-30 billing options and business credit bureau reporting.
5. Pay Your Bills On Time
Paying your bills on time, every time is a rule that you should live by both personally and professionally. Each time you pay a bill on time, you demonstrate that you can be trusted as a responsible borrower with sound financial management skills. Consistently sending in late payments or skipping them altogether can damage your relationships, trustworthiness, and credit score.
6. Monitor Your Business Credit Report
Even though business credit reports are accurate for the most part, errors do happen. Checking your credit history periodically helps ensure that all information is correct before filing applications for financing or vendor relationships.
The most common business credit bureaus to monitor are Dun & Bradstreet, Experian, and Equifax. Any errors or discrepancies can be managed by filing a dispute with the respective reporting agency.
Benefits of Having Good Business Credit
Good business credit opens the doors to many different business relationships, financial ventures, and competitive options. The business credit profile reflects a business’s level of risk, financial management skills, and degree of trustworthiness.
While the chance of never needing outside financing exists, time-sensitive opportunities, commercial property sales, and one-time offers could become vessels for exponential business growth. A strong business credit rating takes time to develop and should be continuously nurtured from the initial formation. Building and maintaining a good credit score will give you access to large amounts of capital at the most competitive rates to reach your higher business goals.
Building Business Credit With Bad Personal Credit History
Business and personal credit scores are technically separate but may still be related on some level. Suppose a business owner operates as a sole proprietor or signs a personal guarantee to take out a small business loan. In that case, personal credit will be checked as part of the application process.
Incorporating your business or starting a limited liability company (LLC) is the best way to separate your personal identity from your business entity. In addition, having an EIN from the IRS allows you to build business credit separately from your personal credit. Before you start showing any business history, however, lenders will likely require your social security number in addition to an EIN when applying for business credit cards or financing.
To keep things separate and avoid giving your social security number, opening an account with an office supply vendor that reports payment history to major business credit bureaus is the easiest way to build business credit with poor personal credit.
Business and personal credit scores are not calculated the same way. Individual FICO scores are calculated from payment history, type of credit accounts, the average length of credit history, and credit utilization percentages.
On the other hand, business credit scores are based on length of time in business, payment history, public filings, and the number of employees. Personal credit score factors carry varying amounts of weight for calculation, while business credit scores are based primarily on payment history.
Business Credit Building Frequently Asked Questions
Building credit history is not complicated but does take time. The easiest way to build credit is by opening a business credit card as soon as you get assigned an EIN by the IRS. Using this credit card for tiny recurring purchases and paying the balance in full at the end of every month will develop a satisfactory payment history.
Opening one or two accounts with companies that report to business credit bureaus through net-30 or net-60 payment agreements will also build up payment history. Vendors, suppliers, and digital marketing agencies are some companies that may offer invoicing agreements to businesses.
Dun & Bradstreet, Experian, Equifax, and CreditSignal provide business owners access to their credit profiles. Equifax currently charges $99.99 to pull one business credit report, while Experian charges $39.99. Dun & Bradstreet credit profiles need to be created and built out by the business owner, with monthly membership prices ranging depending on the level of services required. CreditSignal is the only free option widely available. While CreditSignal won’t display the entire credit report, monthly updates and credit profile changes are provided.
Business credit history is a reflection of a business’s trustworthiness, ability to manage money, and risk level for future business deals. Even though it takes a while to develop, building credit history is worth its weight in gold. Opening and nurturing one or two credit reporting accounts early on will help position your business for long-term success in both professional relationships and financing needs.
Establishing a solid credit history for your business is a slow and steady process that takes several years. However, having a formal record of on-time payments and responsible financial management will position your company to give an excellent first impression to future investors, partners, and lenders.
Yes, it is possible to established business credit quickly, but it will take years for a strong credit score to be present. As soon as you open a business credit card and establish a business bank account, you have some history – but it may not be enough for lenders to qualify you for other financing options.
Funding Your Business Is Our Business
Business Credit Building in Summary
Like personal credit, building business credit takes time – often several years. Opening business credit accounts early on with a solid record of responsible borrowing will ensure that your business will be in good shape when you’re ready to apply for more significant financing options in the future.
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