What is Business Credit?
Business credit is the ability of a business to qualify for financing. Businesses have credit reports and scores just like people do. Business credit bureaus Dun & Bradstreet, Experian, and Equifax all keep a record of debt payments and other credit information on businesses.
Your business credit report may be used by lenders, creditors, suppliers, insurance companies and other organizations evaluating a credit or insurance application or business deal.
These tips on how to establish business credit and then build a business credit profile can help you bring your plans and aspirations to fruition.
Let’s look at each of these steps in depth.
How do I build business credit?
1. Put Your Business on the Map.
Just because you’re open (or about to open) for business, doesn’t necessarily mean you’ve put yourself on the map. You can’t effectively establish credit until you’ve established your business! Get a business phone number and have it listed in the directory. Every credible business should have one. You’ll also want to open a business bank account in your official (legal) business name, and regularly use it to pay your bills. You need to open a business credit file in order to establish business credit.
2. Establish and Maintain Good Credit Relationships with Suppliers and Vendors.
In the world of business, a solid line of credit with industry-relevant vendors or suppliers is like gold. The better your relationship, the more likely you are to avoid paying up front for items or services. If you can secure a line of credit or payment terms with just a few (3-5) vendors or suppliers that report those payments to business credit reporting agencies, you can establish a positive business credit history.
3. Obtain an Employer Identification Number.
A Federal Tax Identification Number, or EIN, is like a Social Security number for your business. You’ll need one of these to change your business entity to a corporation, and you may need one to open a bank account under your business’s name or secure business contracts.
4. Pay on Time All the Time.
This is probably the number one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. A late payment history, especially severely delinquent payments, will bring down your business credit rating and negatively impact your business credit profile.
5. Open a Business Credit Card.
Opening a business credit card with a creditor that reports to the major credit reporting agencies is a great way to establish business credit. You definitely should have at least one open business card, but more than one can also help. However, be sure to use caution and avoid overextending your business finances. Just because the credit is available through your business credit card doesn’t mean you need to (or should) utilize all of it.
6. Get Incorporated.
If you haven’t already, seriously consider getting incorporated or becoming an LLC. By adding Inc. or LLC to your business name, you’ll be legally separating your business and personal credit profile and assets. If you choose not to do this and continue to operate as a sole proprietor, your business and personal credit history (among other things) will be legally attached, and your personal assets might be at risk should you ever be sued.
7. Separate Business and Personal Expenses.
Given the steps above, this is fairly redundant, but nonetheless important. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be separating your business and personal expenses. Make sure to only spend money from your business checking account rather than your personal when it comes to business expenses. Clearly separating your personal from business expenses also makes it a lot easier to manage taxes!
8. Monitor Your Credit.
25% of small business owners have reported significant errors on their credit reports. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency.
Once you have established business credit, your next step is to build strong business credit. Many of the steps above will help you do just that, but it’s important to focus on two specific steps to help you boost your commercial credit history.
The first step is to pay bills early. In the advice above, we mentioned how it’s important to pay on time. But with some business credit scores, you can, in essence, get “extra credit” for paying your bills before they are due. Payment information on your business credit report is often more detailed than on your personal credit report. Pay faster if you can, and you may build your business credit score more quickly.
The second piece of advice for building good business credit is to make sure you have accounts reporting to the various business credit agencies. Again, not all vendors and creditors report to all commercial credit agencies. For example, your business credit card issuer may report to SBFE but not to D&B; you won’t know until you check your reports.
So be sure to check your credit reports and scores with more than one major credit reporting agency to find out whether your accounts are helping your scores, and if not, consider adding additional credit references.
