How to Establish Business Credit

How to Establish Business Credit

Experienced entrepreneurs know that the early steps required to start a business are some of the hardest. Coming up with a business plan is just the beginning. Aspiring business owners also need to finance their start-ups, and that generally requires establishing and building business credit. This article discusses how to establish business credit for your business.

What Is Business Credit and Why Is It Necessary?

Before discussing the steps required to establish business credit, it’s worth addressing some of the basics. In its simplest form, business credit refers to your company’s ability to handle finances, manage debt, and expand purchasing power. Like personal credit, it’s something you’ll have to build over time when you start a new business.

Business credit is also similar to personal credit in terms of how it impacts interest rates, loan terms, and creditors’ acceptance rates. If you have good business credit, you’ll have access to better financial products. Having good business credit can also help in negotiations with vendors, suppliers, insurance companies, investors, and other entities.

How to Build Business Credit

Just understanding what business credit is and why it’s important won’t help anyone. Now that you’ve got a basic understanding of the key concepts, it’s time to take a look at the concrete steps you’ll need to take to build business credit.

Step One: Register Your Business

If you want to establish business credit for a brand-new company, you’ll need to register your business first. After registering with the appropriate entities, you can create a business profile and apply for a specialized federal tax identification number known as an employer identification number (EIN). It’s your EIN that will allow you to begin building business credit.

Step Two: Keep Information Current With Credit Bureaus

There are three primary credit bureaus that create and manage business credit scores:

  1. Experian
  2. Equifax
  3. Dun & Bradstreet

Each of these entities uses a different formula for calculating scores, and each lender reports different types of data. You don’t need to know everything about what data is being used to calculate your business credit score, but you do need to keep your information current and monitor your scores through all three bureaus.

Step Three: Establish Trade Lines

Purchasing supplies and materials from third-party vendors can help you build business credit. Most suppliers will extend trade credit to entities with EINs, even if you haven’t yet built up your business credit score. Trade credit allows you to pay days or weeks after receiving inventory instead of beforehand, and this kind of accounts-payable relationship can contribute to building a higher business credit score. Just make sure to stick to the terms of your trade agreement.

Some business credit bureaus, including Dun & Bradstreet, require multiple tradelines before they will assign a business credit score, in this case, known as a Paydex score. You should ask every supplier or vendor you work with to report tradelines or list them as references on your account so that Dun & Bradstreet can follow up and collect trade data. Even vendors like office supplies distributors can submit trade credit data, and any reported tradeline will help.

Step Four: Make Payments On Time

Though every credit bureau has a slightly different methodology for reporting scores, all of them consider payment history. Make a point of paying every bill on time or, ideally, before it’s due. Dun & Bradstreet will only assign a perfect Paydex score if you pay early. Credit utilization is also a factor in determining business credit scores, so make a point of using your cards or credit lines, but don’t max them out.

Step Five: Borrow From the Right Lenders

Taking out small business loans can boost your business credit, but only if you make all of your payments on time or early and the lender reports your transactions to the right credit bureaus. Not all lenders report to the bureaus, but you should still have plenty of options. At this stage, bank loans are probably out since they have more stringent eligibility requirements, but many online lenders also report to the credit bureaus. When in doubt, ask before taking out a loan.

Step Six: Take Out a Business Credit Card

Using a business credit card and paying it off in full every month can help you build credit. Many companies also offer 0% intro APR periods, plus benefits and rewards. Plus, credit card issuers often take an applicant’s personal credit history into account, as well, which means you’ll be more likely to qualify with a good personal credit score even if you haven’t yet established good business credit. It’s only once you’ve reached a revenue threshold that allows you to consider corporate credit cards that you’ll have to rely on business financials, alone.

Step Seven: Keep Your Records Clean

Your business credit report doesn’t just contain details about your payment history. It also has public records filed in your company’s name, which can include liens, judgments, and bankruptcies. All of these issues can be viewed as negative marks on your business credit report, so try to avoid them. Remember, this article discusses how to establish business credit not how to destroy it!

The Benefits of Establishing Business Credit

Many small business owners get on their feet by using their personal credit to finance business purchases, but that’s not a permanent solution. Establishing business credit may seem like an unnecessary hassle, but the benefits by far outweigh the minor drawbacks of having to apply for new credit lines and loans. Establishing business credit will:

  • Grant you a more favorable position when it comes time to negotiate with new vendors or suppliers.
  • Reduce the need to prepay for products or services.
  • Improve your chances of meeting strict eligibility requirements for low-interest loans.
  • Allow you to obtain better credit terms from banks and other lenders.
  • Lend your business an air of legitimacy that will contribute to building its reputation.

Alternatives to Following the Steps Above

If you’re looking for a simpler solution that doesn’t involve as many steps, starting a business from scratch might not be the best solution. You may also want to look into purchasing an established business. An established business will already have an EIN, relationships with vendors and suppliers, and a solid credit history.

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