Building business credit plays an essential role in your company’s funding ability. A strong business credit score can help you secure better terms on business loans, get lower rates on business insurance and negotiate more favorable terms with suppliers. But companies don’t just start with a good credit score; you need to build business credit from the ground up, or even rebuild it if your business previously struggled with cash flow and delinquent payments.
Whether you operate as a limited liability company or corporation, your business has the ability to establish a credit file separate from you as an individual. When you register a business, it becomes recognized as a separate legal entity with the ability to enter into contracts. If you happen to operate as a sole proprietorship, it’s important to understand there is no legal or financial separation between you and your business. If that’s the case, when you obtain credit or apply for funding, all activity will be solely tied to you as an individual and reflected on your personal credit reports.
To keep your business and personal finances separate, the first step is to start building credit in your company’s name. This Union Commercial Capital blog post shares a few tips on how to build your business credit fast.
Choose the Right Business Structure & Register Your Business
To make your business a distinct legal entity requires that you select a business structure such as an LLC, LLP or corporation. Remember, sole proprietorships do not create a separate business entity.
Once you form your business entity, the next step is to register your business. This particular step is dependent on your structure and where your business is located.
Get a Federal Tax ID Number
Your Federal Tax ID number, or employer identification number (EIN), is like your business’s Social Security number; it’s what the government uses to identify your business. Your EIN is also a major piece of information for paying business taxes throughout the year. By requesting this number once your business is registered, you’re gaining a corporate ID number that you will use to file taxes, open a business bank account and apply for business licenses.
Open a Business Bank Account
Once you have your federal tax ID, you’ll want to open a business bank account for your company. This is a mandatory step in creating a clear separation between your business and personal expenses. Your banking relationships also play an important role in your company’s funding potential. Not only does your business bank account serve as a bank reference on credit applications, it also allows provides key data that lenders use during a funding review.
Get started on separating your business finances from your personal finances by establishing a business bank account. Setting up this type of account will also help you get a business credit card and begin building a relationship with a lender that may be beneficial down the road if you need a small business loan to grow your operations.
Establish Credit with Vendors Who Report Payments
One of the easiest ways to build business credit is to apply for net terms with vendors and suppliers. As you buy supplies, inventory, or other materials on credit, those purchases and payments get reported to business credit reporting agencies. This activity creates your company’s credit profile and business credit report. After your company has several trade lines reporting, a business credit rating is generated.
Also remember, it’s important to select vendors and suppliers that report to a business credit reporting agency. Each relationship you have also serves as a trade reference that can be used on future credit applications as well.
Borrow From Lenders That Report To Credit Bureaus
Small-business loans can boost your business credit if you make all your payments on time, but not all lenders report to business credit bureaus. Make sure to ask your lender whether they report before you take out a small-business loan.
Pay Early
One of the most powerful tools you have when building credit is simply paying your bills. By paying your bills in full and on time, you’re proving that you can make good on your debts. If you pay bills early, however, you may be able to build your business credit score even faster. Credit is essentially an agreement between you and a lender that you’ll pay them later for a product or service you need now. So, when bills come due, make sure you pay them. This is the most basic concept behind building credit.
Other factors that play into your business credit score include the length of your credit history and credit utilization. Aim to maintain relationships with creditors and to use less than 30% of available credit, including business credit cards and lines of credit.
Avoid Judgements & Liens
Judgments, liens and bankruptcy filings in your business’s name all negatively impact your business credit score. Unpaid taxes or business debt can result in a lien, giving creditors the legal right to seize your property in order to satisfy the debt. And unpaid debt may eventually result in a court ruling — or judgment — against your business to collect the debt. These negative marks on your business credit report can haunt you. Bankruptcies, for example, stay on your Experian credit score for 10 years; tax liens, judgments and collections remain for almost seven years.
Monitor Your Business Credit Reports
There are three major business credit reporting agencies so it’s important to monitor each of your company credit files. Each agency collects data from various sources and may have different information about your company. The good news is each of the business credit agencies provide a way for you to update basic information about your business. If you uncover any outdated or incorrect information, you’ll want to contact the agency to make the appropriate change.
Bottom Line
Having a business credit score is essential to running a financially viable and healthy business. It proves to lenders and other businesses that your company is financially healthy and capable of making important payments. It will not only help you get loans but can also provide you with opportunities to avoid prepayment. As a negotiation tool, a good credit score can help you drive down prices or obtain more favorable interest rates and terms on financing packages from banks and online lenders.
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