Build Business Credit: A Step-by-Step Guide for Entrepreneurs
Tue | July 2024
Having a strong business credit history is crucial for every small business. Your business credit score can significantly impact your chances of obtaining financing. It also opens the door to financing with better terms, negotiating favorable conditions with your suppliers, and attracting potential investors.
You are in the right place. With this guide, you are opening a treasure chest of financial benefits. We will provide you with the steps you need to build and maintain healthy business credit. Let's get ready to embark on a journey of growth and success.
Business Credit vs. Personal Credit
Understanding the difference between business credit and personal credit is easy. Think of personal credit as a report card for your financial habits, while business credit evaluates your company's financial responsibility. Both use different identifiers:
Personal Credit: Your credit is linked to your Social Security number (SSN) and reflects your bill payment and loan history.
Business Credit: Your business credit is connected to your Employer Identification Number (EIN) and shows how well your company manages its finances.
Companies like Dun & Bradstreet, Experian Business, and Equifax Small Business gather information about your business from public records, vendor reports on your payment history, and financial statements. This data creates a complete picture of your business's ability to meet its financial obligations, known as your business creditworthiness.
Just like late payments on personal credit cards can hurt your score, late payments on business financing or vendor invoices can negatively affect your business credit score. We'll explore these factors in more detail later.
Now, let's get down to business! What steps can you take to build a strong business credit score?
How to Get Your Business Credit in 7 steps
Step 1: Establish a Legal Business Structure
When you start your business, choosing a legal structure is crucial because it affects how you build business credit and how much risk you pose to lenders.
Sole proprietorships and some partnerships have unlimited liability. That means your personal assets (car, house) could be at risk if your business can't pay its debts. From a lender's perspective, this is a risky situation. If you default on a loan, they might have to go after your personal belongings to recoup their losses. This uncertainty makes them less likely to approve loans or offer reasonable terms, such as low interest rates.
In contrast, limited liability companies (LLCs) and corporations create a separate legal entity from you. This structure protects your assets from business debts. So, if the business fails, your finances are safe. For lenders, this separation of liability makes your business a more attractive borrower. They're more confident you will repay their loan because they can't go after your personal assets if things go south.
This translates to higher creditworthiness for your business, potentially leading to easier loan approvals and better terms. For strong business credit, consider forming an LLC or corporation. But remember that responsible financial management is critical to a healthy score, no matter the structure.
If you need help determining which structure is right for you, consult a legal or financial professional. Also, see our guide, "The Essential Guide to Types of Business Ownership: From Startup to Established." It explores the pros and cons of different business structures.
Step 2: Secure Your DUNS Number
A DUN’S number is a unique identifier assigned by Dun & Bradstreet, a leading business credit reporting agency. It helps lenders and potential partners easily find and assess your business credit profile. The good news? Obtaining a DUN’S number is completely free!
To get a DUN’S number, you'll need to provide some basic information about your business, such as:
Business Name
Address
Legal Structure
Start Year
Employee Count (full-time and part-time)
Visit Dun & Bradstreet's website to learn more and apply for your free DUNS number: How to Get a D-U-N-S Number.
Step 3: Obtain an EIN from the IRS
After obtaining your DUNS number, you will need an Employer Identification Number (EIN), which allows you to establish a separate business credit history. An EIN is essential for getting business loans, accessing credit cards, and other financing options at favorable rates.
You can quickly request it on the IRS website, here is a resource: Apply for an Employer Identification Number (EIN) online.
Step 4: Open a Business Bank Account
With your EIN secured, the next step is to open a dedicated commercial bank account for your business. Separating your business and personal transactions can offer you several advantages. It gives you a clear view of your income, expenses and profitability, making accounting and filing taxes easier.
Additionally, it shows good financial management to potential lenders. They often favorably view a separate business bank account when considering business loan applications. Opening a business bank account is a simple process. While requirements may vary slightly by bank, these are the typical documents you'll need:
Proof of business structure (certificate of incorporation, business license)
Your EIN number
Company name, address, and contact information
When selecting a business bank account, consider the features that fit your needs. Look for online banking options for convenient account management. Compare monthly fees, transaction fees, and minimum balance requirements. Additionally, some banks may offer the convenience of online account opening. It is worth checking with your preferred banks to see if this option is available.
Step 5: Apply for a Business Credit Card
Using a business credit card responsibly and paying your balances in full each month is a fantastic way to build a strong credit history for your company. Beyond building credit, business credit cards often offer rewards programs that can benefit your business. You can earn cash back, travel points, or discounts on business purchases, putting money and points back into your company.
Consider rewards programs (cash back, travel points, purchase discounts), credit limits (enough to cover expenses without overextending), and rates (benefits outweigh costs). Compare annual fees, interest rates, and additional fees of different cards. Some popular options include Capital One Spark Cash Select, Blue Business Cash from American Express, Chase Sapphire Preferred, and American Express® Business Platinum.
Responsible credit card use is key. Always pay your balance on time and in full to avoid high-interest charges and protect your business credit score.
Step 6: Build Business Lines With Suppliers
Now that you've established a line of credit with a business credit card and are demonstrating responsible payment habits, it's time to leverage that creditworthiness with another key player: your suppliers.
Many offer supplier trade lines, which allow you to purchase inventory and pay later, usually within a set timeframe (net 30, 60, or 90 terms). Think of these as credit report cards from your vendors. Your payment history with them dramatically affects your business credit score.
If you have a new business, start small. Make timely payments for smaller purchases on a net basis (e.g., net 30). This demonstrates your reliability and encourages suppliers to offer you longer terms (such as net 60 or net 90). Remember, on-time payments are crucial to maintaining a positive credit history.
Step 7: Monitor and Manage Your Business Credit
Congratulations! You've built a solid foundation for your company's financial health. But remember, building business credit is a marathon, not a sprint. Just like personal credit, it requires ongoing monitoring and management. Staying alert can help you:
Catch Errors Early: Mistakes in business credit reports can lower your credit score. To avoid this, habitually check your reports at least quarterly. This way, you can spot and fix errors before they affect your ability to get loans or financing.
Make Informed Decisions & Take Better Deals: Checking your credit regularly keeps you updated on your creditworthiness. This helps you make smart decisions on business loans and financial plans. Plus, it might lead to better deals with suppliers and vendors who often offer better terms to businesses with solid credit.
Once you've established credit, you can easily review your reports through:
Experian Business Credit
Dun & Bradstreet
Equifax Business
Ultimately, by watching your business credit's health at least quarterly and making wise financial decisions, your business will be up for long-term success. Consider setting up alerts with credit reporting agencies to notify you of any changes to your report. This can help you stay on top of any potential issues.
Take Control of the Future of Your Business
Building business credit is a powerful tool for entrepreneurial success. By following these steps, you've equipped yourself with the knowledge and tools to take charge of your company's financial health. Now, you can confidently explore financing options and unlock a world of possibilities for your business growth.
Take Action Today! Implement these steps and watch your business credit grow stronger, opening doors to new financial opportunities.
At One Park Financial, we believe that all small business owners should have the working capital they need to take the risks needed to be successful. If you have been in business for three months and are generating $7,500 a month of sales, we can help you get the working capital your business needs. Get started here; the pre-qualification process takes less than two minutes.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.