Tips • February 5, 2024
How to Build Credit as a Business
Running a successful business isn’t just about selling a good product. A lot of your success as a business owner, especially in the early days of your growth, will depend on your ability to secure funding.
The most straightforward way to get things off the ground is to make use of different credit and loan options available to you. To get the best options, you’ll need to establish and build your business’s credit.
This article will discuss 5 key strategies for building business credit:
#1: Set Up Your Business Credit Profile
The very first thing you want to do is to set up your business credit. Be sure to separate this from your personal credit, and use it exclusively for the business.
A lot of entrepreneurs start by using their personal credit cards for business expenses, which mixes their business credit history with their personal credit.
While this isn’t always a problem, it’s easier to keep track of your business credit and financial reporting, when it’s not mixed with your personal expenses. Keeping your finances separate from the beginning, makes it much easier to track your financial activities at tax time.
In terms of building a business score, some institutions will evaluate your personal credit in tandem with your business credit. Others will look exclusively at business credit. Make sure you know the operating procedures of the institution you’re planning to work with.
To start setting up your business credit you’ll need to:
- Set up your business structure- You can choose between an LLC, LLP, or a corporation. This step is to legally separate your personal identity from your business’ identity.
- Get an EIN- Employer Identification Numbers (EINs, also known as Business Tax ID Numbers) are the business equivalent of Social Security numbers. Having an EIN is useful for streamlining other administrative steps like opening a business credit file.
- EINs are offered by the IRS for free, and you can even apply for them online.
Remember: You don’t need to have employees to get an EIN.
- Open a business bank account- To keep things simple and compliant, you keep your business entity separate from your personal expenses.
- Do this by registering a separate bank account for your business. In addition to being easier during tax season, it will make your bookkeeping and financial reporting much cleaner as well.
- Register with business credit bureaus- Credit bureaus are companies that are in charge of giving your business a credit file number.
- This number is used by lenders to evaluate your business’s creditworthiness. There are a few major credit bureaus out there that you can work with, but the most frequently used one is Dun & Bradstreet, which provides you with a DUNS number.
#2: Get a Business Credit Card
Now that you’ve set up your credit, it’s time to build your rating. Just like with your personal credit score, the simplest way to build a business credit score is to get a business credit card and use it to make purchases for your company.
These credit cards usually come with perks that are geared specifically towards businesses such as:
- Loyalty points
- Travel protections
- Expense management
To maximize the usefulness of your credit card, identify what types of business credit cards are available, and focus on what perks would be most useful for you.
For example, if you travel often for your business, then travel rewards and protections make sense for you.
In addition to the starting steps we discussed earlier, you’ll need some other information for your application:
- Revenue of your business
- Number of years you’ve been in business
- Number of people employed by your business
- Address of your business
- Your personal information
#3: Work with Companies that Report to Creditors
Transparency is crucial, whether it’s with the vendors that supply your business, or with the lenders and creditors that fund you. Always try to work with other businesses that report to the same credit bureaus you’ve registered with.
When you file a credit report, it helps business credit reporting agencies give more accurate information about your company to lenders in the future.
Having the most up-to-date information possible when you’re seeking funding will look good on you. If credit bureaus give outdated reports to lenders, because they haven’t received updated information from you, it could significantly reduce your odds of being accepted for funding.
If your existing vendors don’t report payments to credit bureaus, we recommend trying to vendors who do. This step is critical to reliably and consistently building your credit rating.
There may be some hesitation by lenders about working with businesses under 2 years of age, and this can make getting funding challenging.
Thankfully, there are other funding options that you can apply to access, like microloans from the U.S. Small Business Administration.
#4: Pick the Right Type of Credit
The size, scale, and age of your business will influence the kinds of credit available to you. It’s important to choose the right financing options for your company.
Here’s a list of the different types of credit you could consider:
- Business credit cards - Pretty much any business can make use of these. Be mindful of which credit card issuers you sign up for, some will have better credit terms or perks that are more suited to your needs.
- Seasonal commercial loans - These are ideal if your business activity changes based on the season (i.e., Landscaping).
- Installment loans - These loans have flexible terms, from >1 year to 30 years, and lower interest rates. However, they require you to repay the loan according to a predetermined schedule.
- Term loans - The most widely used commercial loans, a term business loan has fixed or floating interest rates and a regular monthly or quarterly repayment schedule. These loans are great for purchasing fixed assets like equipment or real estate.
- Business lines of credit - These are much more advantageous than business credit cards, as they have much higher limits and lower interest rates. However, they’re also harder to acquire for newer and smaller businesses.
This doesn’t mean that you can only choose one type of credit. You can mix and match different credit types, but be cautious not to take out too many loans or lines of credit at once. This doesn’t look good for your business or paint lenders in a good light.
#5: Stay on Top of Your Payments
Managing multiple credit cards, loans, and lines of credit can become overwhelming. It’s your job to keep them under control.
Making payments on time is the easiest way to build strong business credit. This applies to any kind of payment (i.e., loans, invoices, and even taxes), not just credit card bills.
On the other hand, missing payments or making late payments will negatively affect your credit rating. There aren’t many things that will hurt your credit rating as much as a payment history riddled with missed or late payments. Too many, and you'll end up with a 'bad credit' score.
Having overdue bills can also affect your credit limit with lenders. Lenders will usually adjust your limit dynamically, based on your repayment history.
Therefore, missing payments is not only bad for your chances of getting future funding, but it can affect loans you’re currently using too.
Paying bills on time is definitely the standard to follow, but it can only get you so far. For example, Dun & Bradstreet scores business on a 1 to 100 scale (100 being the highest score).
If you never make late payments, you’d still only get a score of 80. To reach 100, you’d have to not only make payments on time, but also consistently make payments ahead of schedule.
Automating remittance is a great place to start if you want to be consistent. You can also schedule these payments ahead of their due dates.
Remember, building credit is just like running a business. It’s a long process, and you need the right tools to succeed.
It’ll take time and a lot of consistency for you to see results. Eventually though, if you follow these steps, you’ll reap the rewards of a great business credit rating.
What business structure should I choose as a solopreneur (sole proprietorship)?
Sole proprietorships don’t need a separate business entity. This means you don't need to register as an LLC, LLP, or corporation.
Does my business need revenue to open a business bank account?
No, that’s a myth.
Can I see my business credit reports like my personal credit reports?
No. A personal credit report is legally required to be accessible for free. This rule doesn’t apply to a business credit profile. You’ll need to pay the business credit bureau a fee to access your report.
Who can access my business credit report?
Anyone can, as long as they pay the necessary business credit bureau fee.
How often should I check my business credit report?
Generally, you should avoid checking it unless you have to because updating it costs money. The best time to do so is before you know a lender or creditor will be checking with credit agencies.
How does my personal credit history impact my business credit?
This is complicated. However, in general, it depends on the size of your business. If you’re a solopreneur, your personal credit is going to be the same as your business credit. The larger your company gets, the less your personal score will matter.
What impacts my business credit score?
The short answers are payment history, collections, lawsuits, liens, and judgments, as well as credit utilization.
How much of my credit should I be spending?
It’s good to make use of the money being credited to you, but don’t spend excessively. Lenders and creditors might see that as a sign of debt reliability, which could result in higher interest rates down the road.
You have to find a balance when using credit to finance your operations, without your business finances becoming entirely dependent on your credit accounts.
Does it matter if my business hasn’t been established for very long?
The length of time you’ve been in business doesn’t matter nearly as much as having a strong credit history.
If you’re a brand new business, you might have a hard time getting a loan. However, what really matters is having a strong, consistent credit history.
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