Access to business financing and credit facilities is essential to startups and established businesses. Establishing a solid business credit helps companies execute immediate and future business plans efficiently.
It's wise to plan and start building business credit early enough to have more time to establish good credit. Borrowing is an excellent option for startups looking to build a strong business foundation and small businesses looking to grow and expand.
Before we talk about building business credit, let's first understand what it is and why it is essential.
What is Business Credit?
It is essential to note that your business has a credit score and report, just like you do. Business credit bureaus like Dun & Bradstreet, Equifax, and Experian record business credit information such as debt payments. Creditors, lenders, and insurers use this information to evaluate your credit or insurance application and business deals. Establishing business credit is also helpful in the following ways:
It helps you separate your business credit history from your personal credit history.
It gives you access to credit facilities.
It demonstrates separation of business from the owners.
6 Steps to Building Your Business Credit
1. Choose the Right Business Structure
Choose a business structure that establishes your business as an independent legal entity such as LLC, LLP, or Corporation—registering your business as a legal entity helps separate business financial liabilities from personal liabilities.
2. Apply for Employer Identification Number (EIN)
The IRS uses your business EIN (Federal Tax ID Number) to track financial transactions for tax purposes. Business credit bureaus also use EIN to record your credit history and keep a credit score. You need this record to qualify and apply for credit facilities.
Your business EIN is also required to open a business bank account and file federal tax returns.
3. Open a Business Bank Account
Your business should operate a checking account in its legal business name for all business transactions. If you use a business credit card for any transactions, pay the credit card bill from the same account.
4. Register Your Business Address and Phone Number
This simple step solidifies your business's existence as an independent entity. In addition, you can now register with business directories, which require businesses to have an address and a phone number to sign up.
Business credit reporting agencies collect information from business directories. It helps to keep up-to-date and consistent business contact information with all popular directories. Some of the most popular directories include Better Business Bureau, Angie's List, and YP.com.
Additionally, a dedicated phone line helps you establish your first trade credit relationship with your phone company. The phone company reports your credit history and helps establish your business credit.
5. Establish Credit Lines with Entities who Report
Apply for net terms with suppliers and vendors to build business credit. Then, as you buy inventory on credit, your purchases and payments are recorded with business credit reporting agencies. Business reporting agencies use this information to create your credit profile and generate your business credit rating.
It is essential to deal with vendors and suppliers who report to a business credit reporting agency.
6. Mind your Business Credit
Building business credit follows the same principles as building personal credit. Practice responsible borrowing habits, such as paying debts on time and in full, to improve your business credit score. Note that late payments will negatively affect your business credit score.
Finally, monitor your business credit history for inaccuracies and inconsistent business information. Correct any discrepancies by filing a dispute with the reporting agency involved.
Crown Financial, LLC helps businesses better manage cash flows to boost creditworthiness. The good news is that we do not need a pile of paperwork and tax return records to qualify for our services. Contact us to learn more about how we can help you improve your business credit score.