Building a strong business credit profile is a fundamental aspect of managing and growing your business. Not only does it give potential creditors and lenders valuable insights into your financial responsibility, but it also empowers your business to stand independently from your personal finances, broadening your access to lending opportunities. In this comprehensive guide, we’ll walk you through seven crucial steps to help you on Building Business Credit.
Quick Overview: How to Build Business Credit
Building business credit is essential for the financial health and growth of your business. It allows your company to access financing, establish credibility, and separate personal and business finances. Here’s a quick overview of the steps to build business credit:
- Register Your Business: Start by registering your business as a legal entity, such as an LLC or corporation, to gain legal recognition and personal liability protection.
- Obtain an EIN: An Employer Identification Number (EIN) is crucial for tax purposes and often required for business credit applications.
- Get a DUNS Number: Acquire a Data Universal Number System (DUNS) number from Dun & Bradstreet to initiate your business credit file.
- Leverage Vendor Credit: Establish credit relationships with vendors and suppliers who report your payment history to credit bureaus.
- Apply for a Business Credit Card: Use business credit cards to build a credit history and manage your expenses efficiently.
- Maintain Good Payment History: Consistently pay bills on time, as your payment history is a significant factor in your business credit score.
- Manage Credit Wisely: Keep credit utilization below 30% of your available credit and consider credit limit increases if needed.
- Monitor Your Credit Report: Regularly check your business credit report to track your progress and identify areas for improvement.
By following these steps, you can establish a strong business credit profile that opens doors to financing and growth opportunities for your company.
Register Your Business Entity
While it’s possible to operate a business under your personal name, registering your business entity offers numerous advantages. This step includes legal recognition, tax benefits, and personal liability protection. Furthermore, a registered business entity is often a prerequisite when opening a business bank account, applying for a credit card, or securing a loan. The specific requirements may vary depending on your location and business type, so consult your local Small Business Administration (SBA) office or relevant authorities for guidance. Here are some common business entity options:
Business Entities and Their Descriptions
- C Corporation: C corporations offer shareholders dividend distributions and liability protection. However, they are subject to double taxation, as corporate income is taxed separately from shareholder income.
- S Corporation: S corporations are pass-through entities, allowing shareholders to report income, losses, deductions, and credits on their personal tax returns. This structure provides tax advantages for both dividends and losses.
- Limited Liability Company (LLC): LLC status is granted at the state level and offers limited liability protection for members.
- Nonprofit Organization: Nonprofits operate without a profit motive and may have different regulations depending on the state.
- Partnership: Partnerships involve two or more individuals who contribute assets and skills to the business. Partners report income and losses on their personal tax returns.
Obtain a DUNS Number
While not mandatory, obtaining a Data Universal Number System (D-U-N-S or DUNS) number from Dun & Bradstreet is a pivotal step in building your business credit. Dun & Bradstreet is a widely recognized business credit bureau used by creditors and suppliers. Acquiring a DUNS number initiates your credit file with the bureau, enabling you to begin building your Paydex score. This number may be requested when applying for loans or seeking international business partnerships.
Secure an Employer Identification Number (EIN)
To establish business credit, obtaining an Employer Identification Number (EIN) is often necessary, as creditors and lenders typically require it on applications. Specific circumstances, such as having employees or operating as a partnership, may mandate an EIN, as outlined by the SBA. While sole proprietorships and single-member LLCs can use their Social Security numbers, relying on your personal credit history may limit your business credit potential.
Leverage Vendor and Supplier Credit
Vendor or supplier credit can be a valuable resource for businesses, especially those with limited credit history or eligibility for other credit options. Many vendors offer payment terms of 30, 60, or 90 days after purchase, often referred to as net 30, net 60, or net 90 vendors. However, it’s crucial to confirm that your payment history is reported to credit bureaus, as vendors are not obligated to do so.
Apply for a Business Credit Card
Business credit cards offer more than just a convenient payment method. They also contribute significantly to building your business credit. Here are some of the advantages they bring:
- 0% Intro APRs: Many business credit cards offer introductory periods with 0% annual percentage rates. This can provide interest-free borrowing for a set period, typically 12 to 18 months.
- Bonuses and Rewards: Business cards often provide cash, points, or miles as rewards for meeting specific spending thresholds. These rewards can accumulate with every purchase.
- Payment Grace Period: While not obligatory, most card issuers extend grace periods from the statement date to the due date, offering flexibility in managing payments.
- Credit Reporting: Your payment history with business credit cards is reported to major business credit bureaus, including Dun & Bradstreet, Equifax, and Experian.
- Accessible to Startups: Business credit cards are accessible, even for businesses with limited credit history.
Cultivate a Positive Payment History
Your payment history is a cornerstone of your business credit score. Creditors and lenders seek assurance that your business can consistently and punctually meet financial obligations. Setting up automatic payments can help ensure all credit cards, loans, and vendor bills are paid promptly.
It’s important to note that your business credit can affect your personal credit if your business card issuer reports payment history to consumer credit bureaus. Therefore, maintaining good financial practices is crucial to safeguard your personal credit rating.
Manage Revolving Debt Wisely
Credit utilization, or the proportion of your available credit that you use, plays a pivotal role in your business credit score. To maintain a healthy credit profile, aim to keep your credit utilization at around 30% of your available credit. If your business regularly requires more credit, consider requesting a credit limit increase to maintain a favorable ratio.
Monitor Your Credit Reporting
As you work diligently to establish business credit, stay vigilant by monitoring your business credit report. This allows you to assess the impact of your financial decisions on your credit profile. Credit reports often include data related to:
- Business size
- Credit utilization
- Length of payment history
- Payment history
- Risk of business failure
By staying informed and proactive, you can take control of your business’s financial health.
Building business credit is a strategic process that involves establishing your business identity, securing credit, and managing financial responsibilities. Initially, your options may be limited to business credit cards, trade credit, or loans with personal guarantees. However, with consistent payments and vigilant credit management, your business can enhance its creditworthiness. This may eventually lead to access to prime interest rates and favorable terms when seeking loans to support your business’s growth and success.
Frequently Asked Questions
Does personal credit matter for business owners?
Personal and business credit are distinct entities, but they can overlap, particularly for sole proprietors. In such cases, personal credit can significantly impact business credit and vice versa. For instance, sole proprietors’ eligibility for a business credit card often hinges on their personal credit history. Be aware that the card’s activity may appear on personal credit reports, so responsible management is crucial to avoid damage to your personal credit.
What is the difference between an EIN and DUNS number?
An Employer Identification Number (EIN) is issued by the IRS and primarily serves tax-related purposes. In contrast, a Data Universal Number System (D-U-N-S or DUNS) number is issued by Dun & Bradstreet and is pivotal for building your business’s credit profile. These two numbers serve distinct functions and should not be used interchangeably.
How do I use my EIN to apply for business credit?
When applying for business credit, you’ll typically be asked to provide either your Employer Identification Number (EIN) or your Social Security number. Ensure you input your EIN when prompted in the provided field, as it is crucial for your business credit applications.
Can I use my DUNS number instead of my EIN?
Your DUNS number cannot substitute for your EIN when applying for loans. Your EIN is essential for tax purposes and financial identification, while your DUNS number is specifically linked to your Dun & Bradstreet Paydex score and business credit history.
What constitutes a good business credit score?
Business credit scores can vary among credit bureaus, each using different scales. For example, Experian’s business credit scores range from 1 to 100, with the average score around 62. The Small Business Scoring Service (SBSS) uses a scale of 1 to 300, with many SBA lenders requiring minimum scores in the 160s. Dun and Bradstreet’s delinquency score, on the other hand, ranges from 1 to 5, with lower scores indicating lower risks of late payments or bankruptcy.
In other related article, Navigating Your Credit-Building Journey with the Petal 1 “No Annual Fee” Visa Credit Card