Establishing good business credit is one of the most important things you can do as a new small business owner. But how do you get the ball rolling?
Here are some tips that can help you build a good credit rating for your business.
What is business credit?
Let’s start off with the basics.
Just like your personal credit score, your business credit score is a number that helps lenders predict how likely you are to pay a loan back on time. Your business credit history is a good indicator of how reliable your business is financially, and a good score will make it easier to obtain financing.
Why is it important to have good business credit?
You’ll want a good business credit history to help you qualify for financing. Without business credit, you may find it more difficult to secure new vendors or business loans. Having good business credit will also help you qualify for lower interest rates, which can save you quite a bit of money in the long run.
A good credit score will show potential new suppliers or investors that your business is dependable and trustworthy. Sometimes you may be able to use a good business credit rating to negotiate favorable deals with new vendors — perhaps for lower prices, lower down payments, or even longer trade terms such as a net-30, which gives you 30 days to pay your bill in full.
Will my personal credit score impact my business at all?
Your personal credit history is just as important as your business credit! Lenders will often do personal credit checks for small business loans. Your personal creditworthiness will be especially important if you do not yet have an established business credit history.
That’s not to say you can’t build business credit if your personal credit score is not where you want it to be. If your personal credit score is lower than you’d like, don’t stress too much. You can still work on building good business credit, even with a less-than-stellar personal credit history.
How do I check my business credit score?
Just like your personal credit score, you can view your business credit report online by looking at reports from the three main business credit bureaus: Dun & Bradstreet, Experian, and Equifax. Checking your business credit file may require a small fee.
Each of the credit bureaus mentioned uses slightly different scoring methods to determine your score, but the basics remain the same. Each business credit reporting agency will take your company’s size and age into account, as well as your credit utilization, oldest financial account, and your business’s payment history.
Establishing your business credit history
Now let’s look at how to establish a credit history for your business. Following these tips will help you build a solid credit foundation.
1. Legally establish and register your business
If you haven’t already, you’ll first want to legally establish your business entity as a sole proprietorship, partnership, corporation, or limited liability company (LLC). Each type of business is taxed differently, so be sure to choose a business structure that matches your needs and goals.
Depending on the business type you choose, you may need to register your business with your secretary of state as well. If you are a sole proprietor or otherwise self-employed, you can register a fictitious business name with your state, also known as a DBA.
2. Check your numbers (EIN and D-U-N-S)
First off, get yourself a dedicated business phone number if you don’t have one already!
Once you’ve officially chosen your business type, it’s time to apply for an employer identification number (EIN) if your business type requires one. Your EIN is like a Social Security number for your business — it’s a unique number the IRS uses to verify your business for tax identification purposes.
Another number you should have is a DUNS number. DUNS stands for Data Universal Numbering System, and it’s how the credit bureau Dun & Bradstreet identifies your business. Having a DUNS number will ensure your business is visible to Dun & Bradstreet and further build your business credit profile.
First, check if your business already has a DUNS number. If not, you can request one with Dun & Bradstreet online. You do not need to request a number identifier with Equifax or Experian.
3. Open business credit accounts
Once you’ve got your numbers straight, it’s time to open some credit accounts with vendors who report to credit agencies. For example, you could try negotiating a net-30 term with a vendor — this kind of agreement gives you 30 days to pay your balance to the vendor in full. Just be sure you’re choosing vendors that report business credit.
You can also build your business’s credit by securing business loans or financing if you need it. Having multiple lines of credit will be beneficial for your credit score.
Make sure you also open a business bank account to handle all your business transactions. Keeping your business finances separate from your personal finances will be an immense help for reporting your business income and expenses when filing your taxes.
4. Get a business credit card
To help build your small business credit, consider opening a credit card or two for your business. This will also help you keep your business finances separate from your personal transactions.
Not only do most credit card issuers report to the major business credit bureaus, but you could also take advantage of other credit card perks such as cashback or travel rewards.
To qualify for a business credit card, you’ll typically need a good personal credit score and make a certain amount of income to be approved. If you have an EIN to include with your credit card application, even better!
How to maintain a high business credit score
Getting credit bureaus to acknowledge your business is one thing. But how do you continue to maintain and improve your business credit score throughout the years?
Here are some good rules of thumb to follow:
- Use a business credit card: Remember that business credit card we suggested in the previous section? Getting one of these and paying your balance in full every month is one of the easiest ways to build and maintain good business credit.
- Timely repayment: Payment history is a huge factor when determining your business credit score. Opening a credit account is easy but on-time payments requires good spending habits and self-control. Pay off your credit cards monthly and be sure to pay your loans and vendors on time. If you have the means, paying early may help build your credit score even faster.
- Control credit utilization: Generally, it’s recommended to keep your credit utilization at or below 30 percent of your available credit. For example, if you had a total credit limit of $10,000, you would want to keep your revolving credit use at or below $3,000 to maximize your credit score.
- Monitor your credit: Sometimes mistakes can happen. It’s good practice to check your business credit every so often to ensure your credit report looks accurate. If something doesn’t look right and it’s affecting your score, you can dispute the error with the credit agency to get it fixed.
- Develop good financial habits: Little habits like budgeting, saving, and paying your bills on time really add up. Budgeting can help you understand where your money is going and where you may need to reallocate funds or cut back on spending to boost your savings. It will help you to spend within your means, which will ensure you’re able to pay all your bills on time.
Main takeaways
Your business credit score is a representation of your business’s financial health. Having good business credit will help you obtain financing options with lower interest rates and make you look desirable to creditors, lenders, and vendors.
With a little time and self-discipline, you can begin to establish good credit for your business and set yourself up for success and growth in the years to come.