A business’s lifeline is its ability to obtain credit and cash. A corporation with business credit is able to take out loans for the purpose of making purchases of goods and services. It is predicated on the belief that money will be paid eventually.
What is the purpose of establishing business credit? Having a distinct legal entity, like a corporation or limited liability company, gives business owners the advantage of building a business credit profile, or credit identity, with business credit reporting agencies. Because credit grantors use it to decide whether or not to offer credit to a business, a business credit profile is crucial.
Before you establish business credit for the first time, the first step is to structure your business as a separate legal entity. Next, you will need to apply for a tax identification number, also known as an employer identification number. This is the number used to identify a business entity for tax filing and reporting purposes.
Once your business has been properly formed and in operation, the next step is to apply for credit in your company’s name. There are several basic types of business credit you can acquire as a newly formed startup or existing business with little to no credit identity established.
- Vendor Credit – Vendor credit is when an individual or business offers products or services that your company can purchase on short-term financing (typically net 30 terms). There are many vendors willing to extend credit to startups with minimal requirements. In some cases, a vendor may require an initial purchase or deposit prior to extending credit terms.
- Supplier Credit – This type of business credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This type of financing is great for conserving cash flow because it gives you time to sell the products you receive from the supplier before having to pay for them.
- Retail Credit – Many small and major brand retailers offer store credit cards for businesses. Unless they’re co-branded, the card can only be used in a specific store. This type of business credit may make sense if you have a specific store you regularly use for business purchases.
- Service Credit – The easiest form of business credit you can establish for the first time is service credit. Your internet, cell phone, cable, satellite TV, web hosting and other utility services are all agreements your company makes with providers.
- Business Credit Cards – One of the most important tools to keep your personal and business purchases separate is a secured or unsecured business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so you can protect your personal credit as well.
These are five ways you can establish credit for your business for the first time. It’s important to closely monitor your business credit reports and scores on a regular basis to ensure the information reporting is accurate and up to date.
Remember, by establishing business credit; banks, lenders, suppliers, retailers, insurers & investors will now be able to better access the viability and creditworthiness of your business. Ultimately, your business credit report will impact the amount of credit, payment terms, interest rates and insurance premiums your business will pay.
There are different kinds of business structures available to businesses, and each has different obligations when it comes to credit.
- Sole proprietor. Sole proprietorships are businesses owned by a single business owner who is solely responsible for the business’s debts. Should the business go bankrupt, creditors are allowed to seize the personal assets of the business owner.
- Limited partnership (LP). Limited partnerships consist of multiple owners, of which only those designated as general partners are personally liable for business debts. The other partners are called limited partners. They have less control over how the business is run but are not personally liable for its debts.
- Limited liability partnership (LLP). In an LLP, all owners of the business are considered partners and have at least some liability protection in the case of negligence or misconduct by other business partners. However, whether the owners are completely protected from personal liability in the event of their own negligence varies from state to state.
- Limited liability company (LLC). An LLC is a business structure that shields a business owner’s personal assets from any claims made against the business. LLCs are required to pay special fees to both national and state governments to operate, making them more expensive to maintain.
- Corporation. In a corporate business structure, shareholders are not liable for the company’s debts beyond the amount of money they have invested. However, unlike LLCs, creditors can sometimes claim the company’s assets in the event of a default, wipe out shareholders’ voting rights, and change the leadership of the company.
How to Build Business Credit
The process of establishing business credit might be intimidating because it can take several years. But you can get started in the correct direction and improve your company credit score by taking the following actions.
1. Build Your Foundation
To effectively establish business credit, it helps to properly establish your business. If your business is new, take the time to set up your business so it appears professional to both clients and lenders.
Read Also: What Does POV Mean in Business?
Get a business phone number and, if possible, get it listed in directory assistance. Get and use a professional email address. Choose and consistently use a business address, which can be P.O. Box or even your home address if you’re just getting started.
Business details such as these may appear on your business credit reports and you want to maintain a consistent, professional image.
2. Register Your Business
Most businesses should be officially registered with their state. If you form a business entity such as an LLC or S Corp in your state, you will complete this step. Annual filings will likely be required. (If you formed your business in another state, you may also need to register your business in the state in which you do business as a foreign corporation.)
If you are operating as a sole proprietorship or independent contractor and have not registered your business, you can file a fictitious business name with your state. (This is sometimes referred to as a “DBA”.)
In either case, you may need to get professional or business licenses. Check your state requirements. Public information such as this may be used by some commercial credit agencies to start your business credit profile.
3. Get a D-U-N-S number
A DUNS number is your business identifier with the credit reporting agency Dun & Bradstreet. If your business doesn’t already have one (you can check whether it does for free), you will want to request one. It’s free.
Creditsafe, Equifax and Experian all have separate identifiers (numbers to identify your business in their systems) but you don’t have to initiate this type of request with them.
An EIN is the business equivalent of a Social Security number. The IRS requires some businesses to get an Employer Identification Number (EIN), but having one is not required to establish a business credit file. However, some business financial applications may require an EIN, and EINs may be reported to business credit reports.
It ensures your business is visible to Dun & Bradstreet.
4. Get Accounts That Report to Business Credit Agencies
The most important part of any credit report is information on how you’ve paid your bills. Past payment history is used to help predict how likely your business is to pay on time in the future. That means you need accounts that will report to business credit bureaus, and not all do. Ideally, you’ll want to establish at least two to three credit accounts with companies that report. More can be helpful as your business grows.
These may include:
- Suppliers and vendors
- Business loans and financing
- Credit builder accounts
- Business credit cards
No lender or vendor is required to report to business credit; some do and some don’t. Some may report to one or two of the major commercial credit bureaus, but not others. So if your goal is to build business credit, you must choose accounts that report.
If you don’t have any accounts with a payment history, you’ll likely have no business credit report or a report with a low credit score.
5. Open a Business Credit Card
Opening a business credit card that reports to the major commercial credit reporting agencies is a great way to establish business credit. You can benefit from perks such as cashback or travel rewards, but you can also use one of these cards to build credit.
Most small business credit card issuers will use the owner’s personal credit scores and income from all sources to determine if you qualify. That means they are available to startups as well as established businesses.
You definitely should have at least one open business card if you qualify, but more than one can also help. That way, you may be able to access a higher credit limit to increase cash flow. However, be sure to use caution and avoid getting overextended as that can hurt your business credit scores.
If you don’t qualify for a business credit card, you can skip this step but come back to it in the future when your personal credit history has improved.
Why is this important? Business credit cards can help establish credit when paid on time.
6. Pay On Time
Payment history is the most important factor for any type of credit score, and especially so for business credit. Business credit reports use a term called, “Days Beyond Terms” (DBT) that describes how many days beyond the due date a payment was made. For example, if your terms with a vendor is “net-30,” and you pay on day 32, the account will be reported as 2 DBT. Yes, that means late payments can affect your business credit score if you pay just a day or two late.
Pay on time or early if you can, and you may build your business credit score more quickly.
Why is this important? Payment history is the single most important factor for building business credit.
7. Monitor Your Credit
Diligently monitoring your business credit history can help you monitor your progress as well as spot mistakes. If you do find an error, be sure to file a dispute with the credit bureau reporting the mistake.
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.
Monitoring your business credit can alert you to problems so you can investigate further.
Good business credit isn’t just nice to have. A strong credit history is something necessary that you’ll lean on if you do any of these things:
- Get access to funds
- Protect ownership
- Protect personal credit
- Build business credit for the future
1. Get access to funds
Business credit is a simple way to access funds that you can invest in your business. From product development to acquiring other businesses, it’s easier to acquire capital through financial arrangements like a line of credit (LOC) if your company has a good business credit file.
2. Protect ownership
Unlike seeking out investors, securing capital through business credit—such as a business credit card service like Shopify Credit—does not affect the ownership of your business. You can grow your business without trading equity.
3. Protect personal credit
Personal credit impacts your ability to get personal loans like mortgages. Separating personal and business credit cards gives you an added layer of protection. If your business struggles to repay its loans on time or has bad credit, this will not affect your personal credit score.
4. Build business credit for the future
Even if you don’t need business credit to access money right now, there is a chance you will in the future. Building a strong business credit account can give you better borrowing opportunities in the long run.