Businesses need cash to operate and grow. Unfortunately, money is often hard to come by, forcing business owners to find financing solutions. More than a third of small businesses applied for financing in 2020. Statistics suggest that you will need to borrow at some point to run your business. As with personal credit, a business must establish good credit.
Building business credit is essential to show creditors that a business is capable of paying its bills and debts. However, many business owners struggle to create credit. Last year, 30% of small businesses that applied for credit were turned down.
As with personal credit, your business credit score can affect the approval of a business loan or credit card. Three business credit bureaus (Equifax, Experian, and Dun & Bradstreet) rate businesses between 0 and 100. You may be familiar with Equifax and Experian – they also measure personal credit scores. The higher the business credit rating, the more likely your business is to qualify for a line of credit or financing.
How to build business credit
Similar to personal credit, building business credit takes time. Don’t wait until you run out of cash – the sooner you start working on your trade credit, the better. The following five steps will help you get started.
1. Establish a business entity
It is common for business owners to mix their personal assets with those of their business at the start. However, this makes it difficult to establish the business as a separate entity. The incorporation or formation of a limited liability company (LLC) officially establishes the business.
Once created, an Inc. or LLC generally protects you from personal liability for business-related events – as long as you follow the proper guidelines to operate. It is important to start treating the new business entity as separate from you. Even if you are incorporated, in order for you to be truly protected, you must show that you have taken the necessary steps to separate your personal finances from those of your business. It will not only help you against legal liability, but also establish business credit.
Incorporation is the first step in getting business credit bureaus to recognize your business. Sole proprietorships or partnerships are not enough. Once your business is officially established, you can begin to build a business credit history.
2. Apply for an Employer Identification Number (EIN)
Once you’ve established your Inc. or LLC, you can apply for a free EIN. The EIN is like a company’s social security number. You’ll need it to apply for credit cards and business loans, open bank accounts, and file taxes. You can apply online via the IRS in minutes to receive your business’s EIN.
3. Open a professional bank account
Once you have your articles of association and an EIN, you can open a business account. Most banks offer business accounts. It’s best to do your research and compare what different banks charge for maintaining a business bank account, as they usually have more fees than a personal account. While it may be convenient to keep your business and personal bank accounts with the same bank, you may decide that another bank or a credit union is a less expensive alternative.
Even if your business is not yet very active financially, having a business bank account is one of the best ways to show that you have separated your personal wealth from that of your business. If you have to pay a business expense, it is best to “lend money” to your business and deposit the funds into the business bank account for the business to make the payment. If you paid for items with your personal credit card, you could write yourself a check later to reimburse you for expenses related to your business. The important thing is to start separating your personal finances from those of your business.
4. Register for business credit
Equifax and Experian automatically pull new business records from the Secretary of State. As soon as you form an LLC or incorporate, you will be recognized. Dun & Bradstreet is the most commonly used business credit bureau and has its own system. The bureau creates three separate credit scores for your business based on public records, industry information, and more.
To view your DB credit reports and facilitate future credit granting by lenders and suppliers, you will need a Data Universal Numbering System (DUNS) number. If you’ve done business with vendors before, you might already have one. Before applying, search for a DUNS number by entering the name of your company. If you cannot find a number, you can file with D&B to get one. But before you can access it, you will need at least three business references. Ask the companies or suppliers you have done business with to report your payment history to D&B, it’s free.
5. Start creating business credit
Now that you’ve taken steps to create a formal business entity and have the credit bureaus tracking your business, it’s time to start building a credit history for your business. One of the easiest and most effective ways is to establish business lines. A commercial line is basically a supplier who agrees to let you pay for the goods later. Known as “net-30”, many vendors will allow you to pay them within 30 days of receiving their goods or services.
Even small business lines help. Start with the companies that are already supplying your business. Ask them to give you terms and / or start reporting your activity to the credit bureaus (if they haven’t already). Reporting is free.
If you don’t have net-30 supplier terms yet, ask. Or consider the following companies:
Crown office supplies: Chances are, your business needs office supplies. Crown Office Supplies will extend a business line and report it to the credit bureaus for an annual fee of $ 99.
Grainger: The industrial supplies company sells household cleaning supplies and commercial equipment. Establishing a line of credit with the business is fairly straightforward, even for new businesses. You will need to call 1-800-GRAINGER (472-4643) to get started.
Uline: Another option for office supplies and business equipment, you can request an account. If you are approved, be sure to choose net-30 and proceed to checkout. Place small orders and pay your bill on time or sooner to establish a positive bottom line for your business.
Monitor your DB credit reports. When you feel comfortable with the track record you’ve built up, consider expanding small business loans or applying for a business credit card that doesn’t require a personal guarantee, such as Brex, Shell (for gas) or Office Depot OfficeMax Business Card.
Does my business credit card report to the business credit bureaus?
Most of the business credit cards available generally use your personal credit to approve you. If you’ve applied for a business or business card that requires your Social Security number, your card history will not be reported to the business credit bureaus. To create business credit, look for business cards that don’t require a personal guarantee.
What is net-30?
Net-30 is a line of credit from a seller or supplier that allows you to buy goods now and pay for them within 30 days. Small businesses should apply for a line of credit with net 30 terms from their suppliers to start building credit. However, be sure to pay your bills on time, as your activity will likely be reported to the business credit bureaus.