business credit score

8 Steps on How to Build Business Credit

How to Build Business Credit

If your business is new or doing well, you may not be thinking about taking out a loan just yet, but there will come a time in every business where you either are forced to take a loan or it just makes economic sense. 

Finding out how to get business funding and increasing your business credit is a common problem 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.

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 is Business Credit?

In a nutshell, business credit is the ability of a business to qualify for financing. Your business has a credit report and score just like you do. Business credit bureaus Dun & Bradstreet, Experian, and Equifax all keep a record of debt payments and other credit information on your business.

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.

Below you will find tips on how to get business credit and then build a business credit profile which will allow you and your business to become the company it was meant to be.

How Do I Build Business Credit?

1. Getting your name out there.

Merely hanging your sign outside your door doesn’t necessarily bring business in the door . You can’t really gain business credit until your business is really established. Get a dedicated business phone number and have it listed in the directory. Every business needs to have one. It’s important  to open a business bank account in your legal business name, and use this account  to pay your company’s bills. You need to open a business credit file in order to establish business credit.

2. Creating a Good Credit Relationship with your Suppliers, Vendors & Lender.

In the business world, a good line of credit with vendors or suppliers is key to building and maintaining credit. Like any relationship, the better it is, the more likely you are to avoid stricter due dates like paying up front for items or services. You can establish a positive business credit history, if you can secure a line of credit or payment terms such as NET 60 or NET 90 with maybe 3-5 vendors or suppliers that report those payments to business credit reporting agencies.  Your vendors aren’t required to report to credit bureaus though, so you need to be proactive and open accounts with those that do, just ask them when signing up.  Additionally, having a good relationship with a lender like Upwise that offers certain small business loans that report payments to the credit bureaus, can help to build your business credit score too.

Now on the other hand, if your clients are paying you NET 30 – 60 – 90 Days, you may be eligible for Invoice and/or Account Receivables (A/R) Financing.  This is typically based on your invoice amount and credibility of the accounts and invoices your business is dealing with.  Click here to Learn more. 

3. Get an EIN (Employer Identification Number)

A Federal Tax ID Number, also called your EIN#, is like a social security number for your business. You’ll need one of these to change your business entity to a corporation, and you may need one to open a bank account under your business’s name or secure business contracts. Also, when obtaining financing having an EIN is most likely to be required and a proof of ownership document with the Federal Tax ID/EIN# on it.

4. Be Diligent about paying on time

This is probably the number one reason why businesses receive a bad credit score. 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.

5. Get a Business Credit Card.

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

6. Become a Corporation or LLC.

You should really 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.

7. Keep your Business and Personal Expenses Apart.

This might seem like a step to jump over but it really is important.  I can’t tell you the number of people that have come to over the years that run their business through a personal bank account.  Most lenders don’t want to touch you unless you’re operating from a business account. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be splitting your business and personal expenses. When you make purchases throughout your daily operations, make sure to only spend money from your business checking account rather than your personal when it comes to business expenses. This will make it a lot easier on your accountant and come tax season, when you’re personal and business expenses are clearly separated.

8. Monitor Your Credit.

Like everything we experience in life there will always be mistakes from human error and credit reports are no different. Regularly monitoring your business credit history can help you spot any issues that aren’t accurate. If you do find a mistake, be sure to file a dispute with the reporting agency.

I Have Established Business Credit, Now What?

Once you have established some credit for your business, the next step is to build stronger business credit. 

The steps above will help you do just that, but it’s important to focus on two important steps to help you boost your commercial credit history.

The best thing you can do is pay your bills early and on time!   As we mentioned above, it’s very important at the minimum you pay your bills on time.   But in some cases, you can get extra brownie points for paying your bills before they are actually due.   This type of payment information is more detailed than you personal credit.   So if you can pay early, you can build your business credit score quicker.

The second best piece of advice for building good business credit is to make sure you have credit accounts or credit cards that are actually reporting to the various business credit agencies.  Remember, not all creditors report to all commercial credit agencies.   For example, your business credit card issuer may report to one agency but not the other; you won’t know until you check your reports.  So you will want to check your scores and credit reports with more than one credit reporting agency to see if you’re gaining progress with the steps you’ve been taking.

How Business Credit Can Increase Your Chance of Financing?

Some lenders or banks want to see less than 30% of your total available credit used before they approve you for additional financing or credit.  So it’s also important to keep an eye on your credit utilization and how much you’re using. Just know your credit limits across all business credit cards, and make sure you’re using 30% or less of what credit you have access to.  This will increase your chances of getting approved for a business loan.  As discussed above, separating your business and personal expenses is another great way to increase your chances of getting financing. 

Are There Any Other Benefits For Establishing Business Credit?

We all should  know that good credit (both consumer and business) is important for the future, but let’s dig a little deeper and look at some more reasons.

A strong business credit score will always help you get better terms on loans. There is nothing a lender likes to see more than a good credit score.  Also you might not have to prepay for a specific product or service, you will find that you will be able to get better trade terms with important suppliers in your industry. In the long run, this will help you save money, keep cash flow positive, and access the funds or assets you need to help your business grow. On the other hand, having bad or no business credit can limit your ability to secure financing.

One of the main reasons business owners are denied funding is due to a failure to understand and use their credit to their advantage. Now that you understand the importance of having good business credit, you should make establishing it and building your business credit a priority.  Implement your credit building strategies and knowledge into your business plan.  Keep tabs on your business and personal credit reports to ensure that your credit scores are soaring.

 Whether you are in the market place for a business loan right now or are considering one for the future, these steps will go a long way to get you the best rates and terms. Please contact an Upwise advisor who will be able to walk you through all of the steps and help you really expand your business to its fullest potential.

Interested in Funding? Don’t wait and Apply Now!

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