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How To Establish Business Credit: 101 Comprehensive Guide

Business Credit

Want to establish credit for your business? Read this comprehensive guide on how to establish business credit to help you grow your business and gain financial independence.

As a business owner, establishing credit for your business is crucial to its success. Building a strong credit profile can help you secure financing, attract new customers, and expand your business. However, many entrepreneurs are unsure of how to establish business credit.

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In this article, we will guide you through the process of building business credit and provide you with the necessary steps to take.

What is Business Credit?

Business credit is a system that allows a business to establish a credit profile and rating, similar to how individuals have a personal credit score. It is a record of a company's financial responsibility and ability to manage debt and credit obligations. Business credit is important because it can impact a company's ability to secure financing, obtain favorable terms with suppliers, and attract new customers.

A strong business credit profile can help a business gain financial independence, expand its operations, and achieve long-term success. Business credit is typically established by opening credit accounts with vendors and suppliers who report payments to credit bureaus.

Why Establish Business Credit?

Before we dive into how to establish business credit, it is important to understand why it is so crucial for your business. Here are a few reasons:

  1. Helps Secure Financing: A strong credit profile will help you qualify for loans and credit lines, which can help you grow your business.
  2. Attracts New Customers: Having good credit can help you attract new customers who are more likely to trust your business.
  3. Increases Purchasing Power: Good credit allows you to purchase more inventory, equipment, and other necessities for your business.

Establishing Your Business

To establish business credit, you must first establish your business as a separate legal entity. Here are a few steps to follow:

  1. Register Your Business: Register your business with the appropriate state agency to establish it as a legal entity.
  2. Obtain an EIN: An Employer Identification Number (EIN) is a unique identifier for your business that is required for tax purposes.
  3. Open a Business Bank Account: Open a separate bank account for your business to keep personal and business finances separate.

Building Business Credit

Once you have established your business, you can begin building credit. Here are some steps to follow:

  1. Obtain Credit Accounts: Apply for credit accounts with vendors and suppliers who report payments to credit bureaus.
  2. Pay Bills on Time: Make sure to pay all bills on time to avoid late fees and negative reports on your credit.
  3. Monitor Your Credit Report: Regularly check your credit report to ensure accuracy and identify any areas that need improvement.
How to Improve Business Credit

If you have already established business credit but are looking to improve it, here are a few tips:

  1. Increase Credit Limits: Request credit limit increases from your vendors and suppliers to improve your credit utilization ratio.
  2. Pay-off Debt: Pay off outstanding balances as soon as possible to reduce debt and improve your credit score.
  3. Keep Credit Accounts Open: Keep credit accounts open, even if you're not using them, to establish a longer credit history.
How To Check Business Credit?

Anyone can go to one of the reporting agencies and look up your business's score. Some agencies offer the report for free but some may charge. Three of the major business credit reporting are Dun & Bradstreet, Equifax Business, and Experian Business.

What is Personal Credit?

Once you accept your first job or apply for a credit card, a personal credit profile is started with the credit reporting agencies - Equifax, Experian, and TransUnion. Eventually, this report becomes an indicator of your ability to pay back a debt.

Information on your personal credit report includes:

  • Total number of credit accounts you have open, including mortgages, credit cards, automobile loans, and other accounts
  • The amount you owe on each account, and the monthly payments you must make on each
  • Accounts that are properly paid
  • "Delinquent" accounts (payments are past due)
  • "Derogatory" accounts (those that negatively impact your credit score)
  • Accounts that have been closed

Personal credit scores range from 300 to 850 with a score of 680 or high considered excellent, though each reporting agency uses its own proprietary algorithm to calculate a personal credit score so your score may vary somewhat with each of these agencies.

Why is business credit score important?
Why is business credit score important

If you’re just launching your business, you have tons of details to address. You might wonder if you even need to pay attention to your credit score. However, having a business credit score is necessary to run a successful business and impacts your growth and success.

Your business credit score impacts:

  • Securing a lease
  • Insurance policies
  • Financing options
  • Protection of your credit
  • Favorable payment terms for your supplies, showing that you pay your bills on time

Build your business credit score from the start of your business to open up financially friendly options.

How does business credit work?

Business credit score typically ranges from 1 to 100. A high score suggests that your business is creditworthy and likely to pay back a debt on time. Business credit score calculation varies slightly from bureau to bureau and is influenced by components like:

  • Credit: Length of credit history, credit utilization, credit mix, payment history, balances, and trends
  • Demographic details: Business size, years in business, and industry risk
  • Public records: Amounts and frequency associated with bankruptcies, judgments, and liens

Paying on time, mixing types of credit used, and not maxing out your credit limit all help build a positive business credit history. Missed payments, outstanding balances, and judgments against you can all lower your credit score. (A judgment is a decision by a court entered into the public record.)

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How to Establish Business Credit
How to Build Business Credit?

Below are eight ways to build business credit.

1. Apply for Business Credit Cards

Business cards typically carry credit limits of $50,000 or more. This makes it much easier to purchase high-dollar goods and services that you need to run your business efficiently. Using a business credit card responsibly can boost your credit rating.

Note that a business credit card stands alone. Your personal credit rating is not impacted by your business transactions. A business credit card also helps you control employee spending and track business expenses. Bonus: Many business credit cards have great perks.

2. Work With Vendors That Report Payments, and Pay Them Early

Vendor accounts that report to the business credit reporting agencies will help your business build business credit. A vendor can be any business – look into where you get your office supplies, inventory, and other outside products or services.

3. Incorporate

It makes it easier to create a business credit file when you form a separate legal entity for your company like an LLC or corporation. This move also makes it easier to qualify for business financing may also provide tax advantages and can protect you from personal liability you might have as a sole proprietor.

4. Separate Business and Personal Expenses

They always say don’t mix business with pleasure and in this case, business owners should avoid mixing their personal and business finances. This is something you should be doing from the get-go. If you haven’t already, make clear definitions between your personal and business finances with separate accounts. This will give you a better vision of what you are spending and where.

5. Get an Employer Identification Number (EIN)

If bringing on employees, you need to register for an employer identification number (EIN). An EIN is a nine-digit number assigned by the IRS used to identify the tax accounts of employers and certain others who have no employees. The IRS uses the number to identify taxpayers who are required to file various business tax returns. Apply for an EIN on the IRS website.

6. Open a Business Banking Account

According to the SBA, as soon as you start accepting or spending money for your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers. You can open a business bank account once you've gotten your federal EIN.

7. Establish a Business Address and Phone Number

It’s important to establish your business with an address and phone number. Here are the guidelines:

How to get a physical address for your business

  • Get a P.O. box from the United States Postal Service
  • Get a mailbox through the UPS Store
  • Use the address of a co-working space
  • Get a virtual business address

8. Keep Business Information Current With the Bureaus

Each business credit bureau collects different information and has unique scoring models. Different suppliers and different lenders report different kinds of data. Because a lender or supplier could pull your business credit report from any or all of the main bureaus, you must maintain all three.

You are allowed to update basic information about your business like employee numbers and years of business. A complete profile is the best practice to keep the information current.

Do’s and Don’ts for Your Business Credit Score

Your business credit score is a crucial factor in your ability to secure financing, obtain favorable terms with suppliers, and attract new customers. To ensure that you maintain a good business credit score, here are some do's and don'ts to keep in mind:

Do's:

  1. Make timely payments: Pay your bills on time to avoid late fees and negative reports on your credit score.
  2. Monitor your credit report: Regularly check your credit report to ensure accuracy and identify any areas that need improvement.
  3. Establish credit accounts: Open credit accounts with vendors and suppliers who report payments to credit bureaus to build your credit history.
  4. Keep credit utilization low: Use credit sparingly and keep your credit utilization ratio low to demonstrate financial responsibility.
  5. Pay off debt: Pay off outstanding balances as soon as possible to reduce debt and improve your credit score.

Don'ts:

  1. Max out credit cards: Using too much of your available credit can harm your credit score and indicate that you may be a high-risk borrower.
  2. Miss payments: Missing payments can result in negative reports on your credit score, making it more difficult to secure financing in the future.
  3. Apply for too much credit at once: Applying for multiple credit accounts at once can signal to lenders that you are a high-risk borrower.
  4. Use personal credit for business expenses: It is important to keep personal and business finances separate to establish a clear credit profile for your business.
  5. Close credit accounts: Closing credit accounts can shorten your credit history, which can negatively impact your credit score.

By following these do's and don'ts, you can establish and maintain a strong business credit score, which will help you grow your business and achieve long-term success.

  1. What do you mean by business credit?

    A company's capacity to make a purchase now and make a payment later is known as business credit. When your firm wants to borrow money, you can find it easier to do so if you build up a strong business credit rating. Get Free Reports And Ratings For Your Business Credit.

  2. How to apply for business credit?

    10 Ways to Build Business Credit Fast

    1. Register your business entity
    2. Get an employer identification number (EIN)
    3. Open a business banking account
    4. Establish a business address and phone number
    5. Apply for a business DUNS number
    6. Open trade lines with your suppliers
    7. Get a business credit card or business line of credit
    8. Borrow from lenders who report to business credit bureaus
    9. Keep business information current with the bureaus
    10. Pay all of your business’s bills and loans back on time

  3. What is the difference between EIN and DUNS?

    For tax purposes, the IRS issues EINs, sometimes known as federal tax IDs, whereas Dun & Bradstreet issues DUNS numbers. While EINs might change, DUNS numbers are fixed for the duration of the firm.

  4. Where can I find my business credit score?

    You can find your business credit score from several sources, including:

    - Business Credit Bureaus: There are several business credit bureaus, such as Dun & Bradstreet, Experian, and Equifax, that compile and maintain credit reports on businesses. You can obtain your business credit report and score from these bureaus for a fee.

    - Credit Monitoring Services: Some credit monitoring services, such as Nav and CreditSignal, offer free access to your business credit score and report.

    - Credit Card Issuers: If you have a business credit card, some issuers provide access to your business credit score and report as a benefit.

    - Lenders: If you are applying for financing, lenders may obtain and provide you with your business credit score as part of the application process.

    It is important to regularly check your business credit score to ensure accuracy and identify any areas that need improvement. By monitoring your credit score, you can take steps to improve your creditworthiness and increase your chances of securing financing or favorable terms with suppliers.

Conclusion

Establishing business credit is a critical step for any entrepreneur looking to grow their business. By following the steps outlined in this article, you can establish and improve your credit profile, which will help you secure financing, attract new customers, and increase your purchasing power. Remember, building business credit takes time and effort, but the benefits are well worth it.

Also Read: Best Recession Proof Industries To Work In

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Meet Amit Ahuja, a passionate and driven individual with a multifaceted interest in business and finance. Amit's curiosity for the world of commerce knows no bounds, as he eagerly delve into market trends, investment strategies, and entrepreneurial success stories. Always on the lookout for opportunities to grow his knowledge, Amit avidly follows financial news and actively participates in networking events to gain insights from industry experts.

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