Eight Steps: How to establish business credit
- Put your business on the map
- Maintain good credit with suppliers and vendors
- Obtain an employer identification number (EIN)
- Pay on time all the time
- Open a business credit card
- Get incorporated
- Separate business and personal expenses
- Monitor your credit
Figuring out how to access business financing and credit is a common quest for both new and existing small business owners. From start-up costs to new expansion strategies, establishing a strong business credit profile with diverse accounts can help make or break your immediate and future business plans.
What is business credit?
Businesses can have credit reports and scores just like people do. Major business credit bureaus such as Dun & Bradstreet, Experian, and Equifax all keep a record of debt payments and other credit information on businesses. Business credit reports may be used by lenders, suppliers, insurance companies and other organizations evaluating a credit or insurance application or business deal.
These tips on how to establish business credit can help you bring your plans and aspirations to fruition.
8 steps to establishing business credit
- Put your business on the map.
Just because you’re open (or about to open) for business, doesn’t necessarily mean you’ve put yourself on the map. You can’t effectively establish credit until you’ve established your business! Get a business phone number and have it listed in the directory. Every credible business should have one. You’ll also want to open a bank account in your official (legal) business name, and regularly use it to pay your bills.
- Establish and maintain good credit relationships with suppliers and vendors.
In the world of business, a solid line of credit with industry relevant vendors or suppliers is like gold. The better your relationship, the more likely you are to avoid paying upfront for items or services. If you can secure a line of credit or payment terms such as net-30 with just a few (3-5) vendors or suppliers that report those payments to business credit reporting agencies, you can establish a positive business credit history.
Your vendors aren’t required to report to credit bureaus, though, so you may need to be proactive and open accounts with those that do. Here are three vendors that report payments to business credit bureaus, and that are flexible when extending credit.
- Obtain an employer identification number.
A Federal Tax Identification Number, or EIN, is like a Social Security Number for your business. You’ll need one of these to incorporate, and you may need one to open a bank account under your business’s name or secure business contracts.
- Pay on time all the time.
This is probably the number one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. Late payments, especially severely delinquent ones, will bring down your credit score and negatively impact your business credit profile.
- Open a business credit card.
Opening a business credit card with a company that reports to the major credit reporting agencies is a great way to establish business credit. You should have at least one open credit card, but more than one can also help. However, be sure to use caution and avoid overextending your business finances. Just because the credit is there, doesn’t mean you need to (or should) utilize all of it. (Find business credit cards that match your credit profile using a free Nav account.)
- Get incorporated.
If you haven’t already, seriously consider getting incorporated. By adding Inc. or LLC to your business, you’ll be legally separating your business and personal profile. If you choose not to do this, your business and personal credit history (among other things) will be legally attached.
- Transition commercial expenses away from personal finances.
Given the steps above, this is redundant, but none the less important. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be separating yourself. Add on your new Inc or LLC, and you’ll be creating plenty of distance. Clearly separating your expenses also makes it a lot easier to manage taxes!
- Monitor your credit.
25% of small business owners have reported significant errors on their credit reports. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency. (Sign up for Nav get an alert when your business credit profile has been created with Dun & Bradstreet or Experian.)