Building credit as a business is just as important as your personal credit score. It makes it easier to get funding, make large purchases, increase cash flow, and negotiate better rates. But establishing good business credit is a process; it doesn't happen overnight. Luckily, there are plenty of ways to start building credit, whether you're a new business owner or an established company.
Here are a few ways to help build business credit:
Establish Your Business
Your business credit journey begins the moment you set up a business. Your business structure and other must-haves, like business bank accounts and tax information, all play a role in establishing your credit history.
What does your business structure have to do with credit? It all depends on how you set things up. Incorporating your company with LLC, S-corporation, or C-corporation, will automatically create a unique business identity. From there, you can build business credit separate from your personal credit history. On the other hand, sole proprietorships have no legal or financial separation.
Once you've registered your new business, the next step is to apply for an Employer Identification Number (EIN) for tax purposes. You can apply on the IRS website. While an EIN doesn't help you build any credit by itself, you will need an EIN to apply for a bank account and any funding. Finally, set up a business bank account to further separate your professional and personal finances and establish a new credit history.
Build Credit with Good Vendor Relationships
Treating your vendors well is good business behavior. But it can also work in your favor because many vendors report company payment history to credit bureaus.
Here are a few considerations:
Do your research. Check with your preferred vendors and ask if they report to any business credit bureaus such as Dun & Bradstreet, Equifax, or Experian. You can add them manually to your credit bureau account, but a quick Google search will give you a list of credit-reporting vendors.
Ask for credit. Set up "buy now, pay later" trade accounts with each vendor. This will open up "trade lines" to different payments that help establish your credit rating. Net 15 or 30 are the most common payment terms.
Pay bills on time. This may sound obvious but paying bills on time is a crucial part of building your credit history. On-time or early payments can go far in netting you a good credit rating.
Add to Your Credit Through Funding
Opening a business credit card is a quick way to boost your credit. Not only will it help with cash flow, but regular, timely payments and keeping your balance relatively low will build a credit history. Your first few credit cards will likely rely on your personal credit history until you've built up enough of a business credit profile.
When you take out a small business loan or business line of credit , your repayment habits can help you build good business credit. Banks usually report their loan payment history to credit bureaus, so if you qualify for a business bank loan you should start seeing a credit score boost.
Newer business owners should also ask their bank about loans backed by the Small Business Administration (SBA). SBA financing programs are offered by various banks may offer more flexible terms than conventional bank loans. SBA-backed loans allow small business owners access to capital for which they would not otherwise qualify.
Remember, reporting works both ways: Paying on time will improve your credit but missing payments and defaulting on loans can harm your credit and ability to get funding again.
Monitor and Manage Your Credit
If you've followed any —or all— of these strategies, your business should now have a credit score that you can track. Moving forward, you'll want to check your credit report and score regularly and make sure all the information is current.
There are three main credit bureaus for businesses:
- Dun & Bradstreet
- Experian
- Equifax
You can still obtain one free annual credit report each calendar year from Experian and Equifax through Annual Credit Report. With Dun & Bradstreet, you'll need to request a unique DUNS number and then sign up for their limited free credit report or paid subscription. Having an established credit report which reflects a positive credit history may provide you with additional financing options and more desirable loan terms.
Building business credit can seem daunting at first, but it comes down to making smart financial decisions as you establish, or re-establish, your company. Just remember that establishing a good credit history is supposed to take time, so you have plenty of chances to learn along the way.