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How To Build Business Credit in 13 Steps

Confused About How to Build Business Credit? You’re Not Alone!

Many business owners and entrepreneurs don’t realize the key differences between business credit and personal credit, so let’s start there. Your business credit and personal credit aren’t linked — but they may be related.

Business and personal credit contains different information, so the scores aren’t necessarily correlated. But if you’re a sole proprietor, it’s a good bet that banks and other lenders will reference your personal credit to see how well you manage debt.

“Many lenders review your personal credit before extending business credit,” says Caton Hanson, co-founder and chief legal officer of Nav, a company that helps business owners understand and monitor their business credit.

This is especially likely if you sign a personal guarantee when taking out a small business loan or opening a business credit card. A personal guarantee basically ensures you’ll be personally liable for the debt — a situation you want to avoid if possible, as it could put your personal assets at risk.

While your business credit and personal credit may be related in certain cases, you can take steps to separate them as your business grows.

What is Business Credit?

Business credit is the ability of a business to qualify for financing. Businesses have credit reports and scores just like people do.Business credit bureaus Dun & Bradstreet, Experian, and Equifax all keep a record of debt payments and other credit information on businesses.

Your business credit report may be used by lenders, creditors, suppliers, insurance companies and other organizations evaluating a credit or insurance application or business deal.

Figuring out how to access business financing and credit is a common quest for both new and existing small business owners. From startup costs to new expansion strategies, establishing a strong business credit profile with diverse accounts early on can help make your immediate and future business plans a success.

These tips on how to establish business credit and then build a business credit profile can help you bring your plans and aspirations to fruition.

Once you have established and built good business credit, be sure to monitor and protect it, just as you do with your personal credit.

Establishing business credit isn’t complicated, but it does take some planning and forethought. The sooner you start, the sooner your credit will start to build.

This article will walk you through steps you can take to establish your business credit so that if and when you’re ready for financing, your business is well-positioned to not only get approved for a business loan, but also get great terms on it.

What Are The Benefits of Business Credit?

If you’re reading this, you already know that good credit (both consumer and business) is important for the future of your venture, but let’s explore the benefits a bit more.

A strong business credit score can help you secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry. In the long run, this will help you save money, keep cash flow liquid, and access the funds or assets you need to help your business grow. Adversely, having bad business credit can limit your ability to secure financing.

In fact, one of the primary reasons business owners are denied funding is due to a failure to understand their credit. [Nav’s Small Business American Dream Gap Report] found that nearly one in four businesses don’t know why their loan applications are denied, yet businesses that understand their business credit scores are 41% more likely to get approved for a small business loan.

Additionally, a big issue with financing a business is dealing with personal guarantees. A personal guarantee is a promise from a business owner that they are responsible for their business’s debt should the business be unable to pay the debt. 86% of businesses use their owners’ personal credit to fund their entrepreneurial dreams! Therefore, establishing separate business credit can help you draw a clear and important line between your personal and business finances and mitigate the need to sign a personal guarantee for business funds.

Now that you understand the importance of having good business credit, make establishing it and building your business credit a priority. Bake your credit-building strategies into your business plan and keep tabs on your credit report to ensure that your credit scores are soaring.

Whether you need a loan right now or not, good credit practices are a great foundation for a successful small business.

Let’s look at each of these steps in depth.

How Do I Build Business Credit?

By having a business credit history separate from your personal one, you can minimize the effect negative events one might have on the other. For example, if you have some financial missteps that impact your personal credit history and score, they shouldn’t impact your small business credit if you have established a clear separation and vice versa.

Why Separate Business and Owners?

Unless you’re operating your small business as a sole proprietorship or general partnership, you need to demonstrate that the business is separate from the owners. One of the key benefits that corporations and limited liability companies (LLCs) provide the owners is protection of their personal assets. Keep this protection in place by consistently showing clear separation between the owners and the business.

Benefits of Having Good Business Credit

Having good business credit can provide a number of benefits, including:

● Positioning your company for more favorable payment terms with new vendors and suppliers.

● Reducing the number of times you will need to prepay for products or services purchased.

● Allowing you to obtain better interest rates and credit terms from lenders and banks.

13 Steps to Establishing Your Business Credit

1. Incorporate your business

With sole proprietorships and general partnerships, the business is legally the same as the owner; therefore, there can be no separation of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s).

So, seriously consider getting incorporated or becoming an LLC. By adding Inc. or LLC to your business name, you’ll be legally separating your business and personal credit profile and assets. If you choose not to do this and continue to operate as a sole proprietor, your business and personal credit history (among other things) will be legally attached, and your personal assets might be at risk should you ever be sued.

2. Separate Business and Personal Expenses

Given the steps above, this is fairly redundant, but nonetheless important. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be separating your business and personal expenses. Make sure to only spend money from your business checking account rather than your personal when it comes to business expenses. Clearly separating your personal from business expenses also makes it a lot easier to manage taxes!

The EIN is basically a social security number for a business. It is required on federal tax filings, and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.

4. Open a business bank account

Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.

5. Establish a business phone number

Whether you use a landline, cell phone or you use VoIP, have a separate number for your business and in your business’ legal name. List that number in the directory so it can be found.

6. Open a business credit file

Open a business credit file with all three business reporting agencies: Experian, Equifax and TransUnion. You need to open a business credit file in order to establish business credit.

7. Obtain business credit card(s)

Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies.

Opening a business credit card with a creditor that reports to the major credit reporting agencies is a great way to establish business credit. You definitely should have at least one open business card, but more than one can also help. However, be sure to use caution and avoid overextending your business finances. Just because the credit is available through your business credit card doesn’t mean you need to (or should) utilize all of it.

8. Establish a line of credit with vendors or suppliers

In the world of business, a solid line of credit with industry-relevant vendors or suppliers is like gold. Work with at least five vendors and/or suppliers to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies.

The better your relationship, the more likely you are to avoid paying up front for items or services. If you can secure a line of credit or payment terms such as net-60 or net-90 with just a few (3-5) vendors or suppliers that report those payments to business credit reporting agencies, you can establish a positive business credit history.

Your vendors aren’t required to report to credit bureaus, though, so you may need to be proactive and open accounts with those that do. Here are three vendors that report payments to business credit bureaus and reporting agencies, and that are flexible when extending credit.

9. Pay your bills on time (and even early!)

Perhaps it should go unsaid, but be sure to pay your bills on time. Like with your personal credit, late payments will negatively impact your business credit.

This is probably the number one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. A late payment history, especially severely delinquent payments, will bring down your business credit rating and negatively impact your business credit profile.

With some business credit scores, you can, in essence, get “extra credit” for paying your bills before they are due. Payment information on your business credit report is often more detailed than on your personal credit report. Pay faster if you can, and you may build your business credit score more quickly.

10. Monitor Your Credit

25% of small business owners have reported significant errors on their credit reports. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency.

11. Make Sure You Have Accounts Reporting to the Various Business Credit Agencies

Not all vendors and creditors report to all commercial credit agencies. For example, your business credit card issuer may report to SBFE but not to D&B; you won’t know until you check your reports.

So 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. With Nav’s Business Loan Builder subscription, you’ll see your business Experian Intelliscore, D&B Paydex Score, and your FICO SBSS score.

How to Build Strong Business Credit

Once you have established business credit, your next step is to build strong business credit. Many of the steps above will help you do just that, but it’s important to focus on two specific steps to help you boost your commercial credit history.

12. Check Credit Utilization

Most lenders want to see less than 30% of your total available credit used before they approve you for additional financing. Keep an eye on your credit limit across all credit cards, and make sure you’re using 30% or less of what you have access to to increase your chances of getting approved for a business loan.

13. Use Your Business Credit to Manage Your Cash Flow

One potential benefit of building your business’s credit is you may become eligible for lower rates and better terms with vendors. Both of these can help you manage your cash flow — the lifeblood of many businesses.

You can also use a business credit card to manage your cash flow. Credit cards may offer fast and flexible financing at interest rates lower than other types of quick funding, such as merchant cash advances. The key is to make sure the overall cost (including interest paid) will result in a profit for the business.

A credit card’s grace period lets you avoid interest charges, while lines of credit might accrue interest immediately. Heads up, though: If you revolve a balance on your credit card, the interest rate may be higher than what you’d pay on your credit line.

Do It Yourself or Would You Like Help?

The above strategies are not complicated but you need a lot of time and effort to build strong business credit.

If you prefer systematic training in business credit and access to no-setup-charge business lines up to $150,000, consider this new opportunity.

(The usual range of setup fees is 10%-15% so these are gigantic savings that more than pay for the cost of the program!)

I have partnered with a prominent lender who offers a great business credit building program. You receive 3 business consultants (personal credit, business credit, business finance), 12 videotaped modules, and a step-by-step approach to securing long-term financing at the lowest possible cost. This integrated approach isn’t available anywhere else.

So why not learn all about business credit while you rapidly build it in the simplest and easiest way possible?

Book an appointment now to discuss how to lay the groundwork for your lowest cost business financing that will save you huge borrowing charges and help you avoid many common mistakes.


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