As you expand your small business, one of your top priorities should be to build business credit. A solid business credit profile can help you qualify for bank loans or other forms of funding with low-interest rates. Here are seven steps to establishing business credit.
1. Register your company and obtain an EIN.
Whether a sole proprietor or a corporation, you must register your company with the appropriate government agencies to establish a business credit profile. Following that, you can apply for a federal tax identification number, also known as an employer identification number or EIN, and begin building business credit.
2. Maintain current information with all three credit bureaus.
Dun & Bradstreet, Experian, and Equifax are the credit bureaus that collect data and generate business credit scores. Each business credit bureau calculates scores differently, and different lenders report different data types. It's a good idea to keep all three credit bureaus because you never know which ones your vendors, creditors, or potential customers will check.
3. Create trade lines with your suppliers.
Purchasing supplies, ingredients, or other materials from third-party vendors may help build your business credit.
Many suppliers offer trade credit, which means you can pay several days or weeks after receiving the inventory. Ask your supplier to report your payments to a business credit bureau if you have this type of accounts-payable relationship.
A Dun & Bradstreet Paydex score, which measures past payment history, requires at least three tradelines. Even if you don't have many suppliers, you can establish tradelines with any small vendor, such as your water or office supply distributor. If your vendors do not report to a credit bureau, you can add them as a trade reference to your account, and Dun & Bradstreet will contact you to collect your trade data.
4. Make timely or early payments to creditors.
Although each credit bureau has slightly different methods for calculating business credit scores, they all take your payment history into account. To maintain a good credit score, make sure your payments are made on time or, better yet, early. Only those who pay on time receive perfect Paydex scores from Dun & Bradstreet. Long credit history is considered advantageous, so the sooner you can establish business credit, the better. Credit utilization is also viewed in business credit scores, as it is in personal credit scores. So use your credit cards and lines of credit, but don't go overboard. Spend no more than 20% to 30% of your credit limit.
5. Use lenders who report to credit bureaus.
If you make all of your payments on time and the lender reports to a business credit bureau, small-business loans can help your business credit. However, not all lenders do. So, if you want to build business credit, before you take out a small-business loan, ask the lender if they report.
Banks usually report to credit bureaus, but if you have bad or limited credit, you won't be able to get a bank loan. Many online small-business lenders that are more willing to lend to bad-credit borrowers, such as OnDeck, LendingClub, Funding Circle, and Bluevine, also report. Other lenders, such as SmartBiz, Fundbox, and merchant cash advance companies, do not report.
6. Apply for a business credit card
A business credit card can be one of the most effective tools for establishing business credit, as long as you pay it off in full each month or take advantage of a 0% intro APR period. In addition, many business credit cards provide benefits and rewards for your spending, ranging from cash back to travel points.
Suppose you have thin or poor personal credit. In that case, you should start your card search by improving your credit score because many card issuers will use your personal history to determine creditworthiness. If that isn't an option, applying for a secured credit card is probably your best bet.
While secured cards typically do not offer rewards and may have a low spending limit, they can still benefit your business credit profile. Furthermore, if you can demonstrate a consistent pattern of responsible repayment, some issuers will allow you to upgrade to an unsecured card.
If you want to avoid a personal credit check entirely, a few cards will evaluate your application solely on the strength of your company's financials. When your company reaches a specific size or revenue threshold, it may be time to consider a corporate credit card, which does not consider your credit score.
7. Maintain the cleanliness of your public records.
Your business credit report will include any public records filed in your company's name, such as bankruptcies, judgments, and liens, and detail your company's history of paying creditors. A judgment is a court ruling; if the verdict in a debt collection lawsuit is against you, it will have a negative impact on your credit score. A lien is the specific legal right of a creditor to seize your property unless you pay an owed amount, such as an outstanding small-business loan or unpaid taxes.
These blemishes on your business credit report can come back to haunt you. Bankruptcies, for example, are reported to Experian for ten years; tax liens, judgments, and collections are reported for nearly seven years.