Every business owner should build their business credit. Why? It gives the businesses access to loans and other capital instruments to keep their businesses financially afloat. Many new business owners have no idea how to build credit with their business and oftentimes business owners have personal credit issues themselves. While business credit is different from personal credit, many principles will be the same in building your business credit. In this article, you’ll discover the 5 simple and practical steps to building your business credit.
Separate From Your Business
If you are just starting out, you want to make sure you are set up for success to build your business credit. How you do this is by separating you as an individual from the business. Why? You don’t want your business tied to your personal credit and how successful the business is should be based on the money the business makes, not your choices personally. You can easily set up a LLC or set up a corporation depending on the liability or industry of the business.
After you have separated yourself from the business, you need to set up your business tax identity. This can be done by filing an Employer Identification Number (EIN) with the IRS. This is free to file and money you make as a business will be paid through this EIN and separate from any personal taxes.
Learn how to File an EIN for free
Register Your DUNS
Just you would set up your credit with the Experian, Equifax and Transunion agencies, there is one for businesses. Duns and Bradstreet is a reporting agency that specifically works with businesses. They report credit with vendors, banks and other agencies to determine the credit worthiness of any business that has an account set up.
Setting up your account on D&B is free and once its complete you receive a DUNS number. Much like the EIN, this number is unique to the business and will follow you as you begin to build your credit. The credit report can be pulled by your business for monitoring or by vendors to determine what terms and credit limits to extend to your business.
Establish Vendor Relationships
Speaking of vendors, the next step you need to take on the road to building your business credit is to apply for vendor credit. If you are from the industrial space, you will know this by another name: Net terms. Net terms are a payment structure where invoice can be paid in 30, 60 or 90 day instead of up front or upon delivery. The company extending net terms will give you a limit based on your credit and will allow you to pay later based on those terms.
After setting up your net term payments with your vendor, you may want to ensure they are reporting to D&B your arrangement. As with personal credit, business credit histories are based on reporting from companies you have credit arrangements with. Your business credit will largely depend on who is reporting this information and if it's available. Larger companies already do this reporting but you may want to inquire with the vendor to see if they are reporting this information.
Pay your bills on time
If you have personal credit, the #1 tip anyone will give you is to pay your bills on time. Just as paying your personal bills builds your credit history and score, paying your bills from your vendors will build your business credit score. If you fail to pay your creditors on time, this will negatively affect your business credit and may lead to defaults if you cannot keep up with your bills.
If you are paying your bills on time, you may want to monitor all the hard work you are putting to building your business credit. As I mentioned before, Duns and Bradstreet do have several tools you can use to monitor your credit and report to vendors for verification but at a cost. If you are looking for something more financially viable, then use a tool like Credit Signal to monitor your credit from D&B and did I mention it’s free?
Sign up for Business credit cards
If you have gotten this far in setting up your company for business credit success, then you could take one more step to build your credit history. The best way to do so is to apply for additional business credit cards. Having additional available credit for the business will allow vendors to evaluate your business and will also give banks a better reason to approve your business.
You don't need to apply for a business credit card to build your business credit. You can use a business line of credit to achieve the same purpose. The line of credit is available through traditional banks and works the same as a business credit card. The idea is to have more credit available to your business to leverage. Check with your accountant and banker to determine which vehicle and limits are appropriate for your business.
Conclusion
So there are your 5 simple steps to building your business credit. What you have to remember about business credit is that this is a process, just like personal credit is. You also need to know that following these steps is not an overnight fix either. These measure can take months to years to positively affect your business to get a business loan or additional credit.
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