Business credit is built over time, but if you haven’t started building it yet – now is the time. Your business credit profile impacts everything from the rates you’ll pay for insurance to the interest you’ll pay on a loan. It can help you negotiate better terms from vendors, giving you room to manage cash flow.
While similar to personal credit, build business credit separately to protect yourself and your business. Here’s everything you need to know about business credit, how to build it, and why it matters.
Just like you have a personal credit score, businesses can have a credit score. Credit agencies such as Dun & Bradstreet, Equifax, and Experian track and record open lines of credit, loans, and debt payments. Third parties use this information when making the decision to do business with you or extend credit.
A business credit report might be used by:
The information on your business credit report could mean the difference between having a small business loan approved or rejected. A landlord could request a larger deposit or deny your application if you have poor credit. Building a healthy business credit profile should be part of your business’ plan for long-term success.
Any small business owner or business needs a business credit score. Failing to keep your business separate from your personal finances could have serious repercussions if someone files a lawsuit against your company or you default on a loan.
Business credit is particularly important, however, when you’re applying for credit or requesting to pay vendors on terms (such as 30 or 45 days after invoicing).
Whether you just opened up shop or have been in business for a few years, here are some tips to help you build business credit.
Once you decide to open a business, it’s important to create space between yourself and the business entity. Establishing your business as a separate entity starts building its credit separate from your personal credit. Choosing your business’ legal structure is an important first step to building business credit.
Small business owners have three choices for a business structure:
Operating as a sole proprietorship will not build business credit. It creates no separation between your personal life and your business. It also could leave you open to the risk of lawsuits and losing personal assets.
An LLC, or limited liability corporation, is a step above a sole proprietorship. It creates a separate entity. A S-Corp or corporation does the same, but with more levels of complexity and separation. Talk to a legal professional and accountant about the right choice for your business.
A federal tax ID is a nine-digit number assigned by the IRS, similar to a social security number for businesses. You can apply on their website for an EIN.
Once you have this number, use it to file your company’s taxes, apply for credit cards and open business bank accounts, and obtain permits and licenses. This creates a paper trail to contribute to building credit, as well as establishes your business’s legitimacy.
The next step to building business credit is to open accounts in your business’s name. Each account opened using your EIN starts to form a picture of your business.
Any small business owner will need a business checking account through which to make payments such as rent or other operating expenses. Also, consider opening a line of credit, a business credit card, or taking out a small business loan. Having a variety of open types of credit proves that you can manage a business’ financial complexities.
Opening and using credit responsibly is a great way to build business credit.
Once you have a business checking account, stop paying any business expenses through personal accounts. Only use the business credit card for office supplies and other business-related costs. If you’re using your personal accounts, you’re not building business credit.
Keeping things separate will also make it easier to track expenses and claim deductions when filing taxes.
Apply for net terms with vendors and suppliers who report to Dun & Bradstreet and other credit reporting agencies. When you buy supplies, materials, or inventory on credit with them and pay your bills on time, they report this information to the credit agencies.
If you haven’t already, register for a Dun & Bradstreet or D-U-N-S number. Registering with the credit agency signals to them that your business exists and ensures that they will begin to track your credit.
This activity builds a robust credit profile and business credit report. Other vendors and suppliers can pull this report when deciding whether or not to offer you terms. Selecting companies who report also ensures that you can use them on applications for credit or as trade references.
Credit reflects your ability to meet your business’ financial obligations. Other businesses, lenders, and landlords want to know that you can be counted on to fulfill your financial responsibilities. Making on-time payments is an important part of building good business credit.
If you’ve gone through the steps above and then vendors are reporting late or missed payments to the credit bureaus, it hurts your business credit score. Once you’ve established the building blocks of good business credit, stay on top of your payments.
Each of the three major credit bureaus collects data from different sources, which means that each credit bureau will have different information about your company. Periodically, check your report at each bureau to identify inaccuracies.
A vendor could report inaccurate data. One credit bureau could show a small business loan as open when it’s paid off. It’s not uncommon for credit reports to have inaccurate or outdated data on them. If you find something that needs fixing, contact the credit bureau to have it removed.
Once you’ve built a good business credit score, focus on maintaining it.
After learning how to build business credit, it might seem like a lot of work to do when you just want to run a business. Why should you spend the time to build business credit?
Strong business credit helps you:
A strong business credit profile has many benefits to your business. You’ll pay less to borrow, saving on interest. You can preserve capital and wait to pay for supplies if you receive good trade terms. And you can protect your personal assets.
Small business owners with poor business credit may be asked to pledge personal assets to secure a small business loan or other credit product or have to opt for bad credit business loans which can come at a much higher rate. A lender could ask for a personal guarantee, which is a promise that you’ll personally be responsible for your business’ debt. A personal guarantee increases your risk of loss. With great business credit, it’s less likely that you’ll be asked to give one.
Now that you understand the importance of business credit, and how to build a good business credit profile, make it a priority in your planning and budgeting. Decide when you’re going to borrow to support growth or for other business needs, and be sure that you can repay the loan. Work with vendors who report to the credit bureaus. And continue to build a strong credit foundation for your future.
