How to Establish Business Credit

Establishing business credit is similar to building personal credit. Business credit refers to all credit available to a business, which can come in various forms, including credit that requires a personal guarantee (PG) and some that does not.

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When a PG is required, it puts your personal assets at risk. It is important to note that you will need your Employer Identification Number (EIN) to apply and use business credit, and in many cases, you will need your Social Security Number (SSN) to verify your identity.

While it is commonly believed that it takes about three years for a business to build credit, it is possible to establish a good small business credit profile and score much earlier. Building business credit is a process, but it does not have to be a lengthy one.

To begin establishing business credit, it is essential to determine the type of vendor credit card that your business needs.

Step 1 Build Your Funding Foundation

The first step to building business credit is to establish a solid Funding Foundation for your business. This involves obtaining all the necessary licenses, opening a business bank account, and setting up a credit profile with each of the credit bureaus. By doing so, lenders and credit issuers will view your business as Fundable.

In addition, it is crucial to organize your personal finances. Obtaining your personal credit report and ensuring that your personal credit score is in good standing can have a positive impact on your business credit score.

To create a strong Fundability Foundation, it is essential to separate your business and personal credit. Incorporating your business, having a separate business address, and a dedicated business phone number are all helpful. A professional business website with an email address that has the same domain name as your website can also make a difference. For instance, if your website is raysrentals.com, your email address should be something like ray@raysrentals.com.

Building Fundability means establishing credibility for your business, which will provide lenders, customers, and prospects with reasons to trust your business.

Step 2 Incorporate Your Business

To start building business credit, you must have a separate entity from yourself, and the best type of business entity for this purpose is a corporation.

Incorporating your business will involve filling out paperwork and paying fees. You can get the specific details from your state’s Secretary of State’s office. The two main types of corporations to consider are C-corporations and S-corporations.

C-corporations are what we commonly associate with corporations. The profits of a C-corporation are taxed and reported on the corporation tax return. Any after-tax profits that are distributed to shareholders as dividends are then taxed again, and are reported on their personal tax returns. However, C-corporations can have an unlimited number of shareholders.

On the other hand, S-corporations cannot have more than 100 shareholders. The profits (or losses) of an S-corporation pass through to the shareholders, and are only taxed to the shareholders and reported on their personal tax returns.

Step 3 Get All Identification Numbers

To obtain a business credit score, it’s important to stop using your Social Security number on credit card and loan applications for your business. Instead, you should use your EIN. It’s a good idea to get your EIN set up early, before you need business credit or loans urgently, as it will save you time.

You can obtain an EIN for free from the IRS website. It’s an easy process, and your EIN will not only be useful for credit cards and loans, but also for filing your business taxes. It’s a versatile number that has uses beyond just building business credit.

In addition to an EIN, you will also need a DUNS number from Dun & Bradstreet. This is another free number with a simple application process. You will need a DUNS number to start building a business credit score with D&B, as well as payment experiences, which we will discuss shortly.

Step 4 Get Set Up With the Business Credit Reporting Bureaus

To establish business credit, you need to set up an account with the business credit reporting bureaus. When you get your DUNS number, it’s best to set up your account with Dun & Bradstreet as much as possible, and provide them with any information that can help your business credit. D&B is the largest business credit reporting agency, and setting up an account with them will also set you up with Experian and Equifax automatically. Check Equifax and Experian for your business records, and review them for accuracy. You should also set up a reminder to check your records and business credit reports with these three credit reporting agencies every year to ensure that they are correct and complete.

Step 5 – Keep Business Details Congruent Everywhere

It’s crucial to ensure that all of your business details are accurate and consistent across all platforms. This includes your business name, address, and contact information on your website, as well as any registration papers filed with the Secretary of State. Any discrepancy, no matter how small, can result in your application being flagged as fraudulent and rejected by credit card issuers, lenders, and business credit reporting agencies.

To avoid this, it’s recommended to copy and paste your business information every time and keep track of where it appears online and offline. It’s also important to check for errors at least once a year, as mistakes can occur over time. Remember that even small differences, such as using an ampersand instead of the word ‘and,’ can result in your application being rejected.

Step 6 – Apply for Starter Credit

There are vendors who offer credit cards and business lines of credit even if you don’t have a good business credit score yet. You don’t need to prove cash flow or have qualified for a business loan to get approved. However, these vendors require you to have a business bank account, which is a crucial factor in establishing a good funding footing.

It’s important to ensure that these vendors report your payment history to one or more of the business credit reporting bureaus. Otherwise, you won’t be building a business credit score even if you manage your credit card well. Remember that your payment history with them is crucial in calculating your business credit scores, which will be essential in getting approved for a business loan in the future.

Step 7 – Monitor Your Credit Regularly

Ensuring that your business credit reports are free of errors is crucial to maintaining good credit and being able to obtain favorable credit terms. Even minor discrepancies in your business information can result in your credit application being flagged as fraudulent, so it’s important to keep your business details consistent across all platforms.

You should also monitor your personal credit reports to ensure that your payment history and credit utilization are accurate. However, unlike personal credit reports, you are not entitled to a free business credit report each year. This can make monitoring your business credit scores expensive, but there are credit monitoring services available, such as Nav, which can help you view your business credit information directly.

By regularly checking and monitoring your business credit reports, you can ensure that your credit score is accurate and reflects your business’s creditworthiness. This is a crucial step in building strong business credit.

FAQ's

What is a Business Credit Bureau?

A Business Credit Bureau is an agency that collects and maintains information on the credit history of businesses. It provides credit reports and scores to lenders, vendors, and other interested parties.

What is a Business Credit History?

A Business Credit History is a record of a business's creditworthiness and financial performance. It includes information on credit accounts, payment history, and public records such as bankruptcies and liens.

What Does it Mean to Establish Business Tradelines?

Establishing Business Tradelines means opening credit accounts in the name of your business and using them to build a positive credit history. This can help you qualify for better financing terms and lower interest rates.

What are Business Credit Reports?

Business Credit Reports are documents that provide information on a business's creditworthiness, financial health, and payment history. They are used by lenders, vendors, and other parties to assess the risk of doing business with that company.

What Does it Mean to Build a Business Credit Profile?

Building a Business Credit Profile means creating a positive credit history for your business by establishing and managing credit accounts, paying bills on time, and maintaining a low credit utilization ratio.

What is a Personal Guarantee?

A Personal Guarantee is a promise by an individual to repay a debt if the business is unable to do so. It is often required by lenders and vendors as a condition for extending credit to a new or small business.

What is a Trade Vendor?

A Trade Vendor is a supplier of goods or services to a business. Trade Vendors often extend credit to their customers, allowing them to pay for their purchases over time.

What is Trade Credit?

Trade Credit is the credit extended by a supplier to a customer for the purchase of goods or services. It is a form of short-term financing that can help businesses manage cash flow.

What is a Vendor Account?

A Vendor Account is a credit account established with a supplier or vendor. It allows a business to purchase goods or services on credit and pay for them later.

What are Business Tradelines?

Business Tradelines are credit accounts that are reported to the credit bureaus in the name of a business. They include credit cards, lines of credit, and other credit accounts.

What is a Trade Payment Experience?

A Trade Payment Experience is a record of a business's payment history with its vendors and suppliers. It is used by credit bureaus to calculate a business's credit score and assess its creditworthiness.

What Does Continuously Reported Mean?

Continuously Reported means that a business's credit accounts are regularly reported to the credit bureaus. This allows lenders and other parties to track the business's creditworthiness over time.

What Does the Term ‘Newly Reported Tradelines’ Mean?

Newly Reported Tradelines refer to credit accounts that have been recently opened and reported to the credit bureaus. They can have a significant impact on a business's credit score and creditworthiness.

What is an EIN?

An EIN (Employer Identification Number) is a unique nine-digit number assigned by the IRS to businesses for tax purposes. It is also used by lenders and other parties to identify a business.

What are Hard Inquiries and Soft Personal Credit Inquiries?

Hard Inquiries and Soft Personal Credit Inquiries are two types of credit inquiries used by lenders and other parties to assess a person's creditworthiness. Hard inquiries can have a negative impact on a credit score, while soft inquiries do not. Hard inquiries are typically associated with credit applications, while soft inquiries are often used for pre-approval offers or background checks.

Is There Such a Thing as a Business Credit Inquiry?

Yes, there is such a thing as a Business Credit Inquiry. When a lender or vendor checks a business's creditworthiness, it is known as a Business Credit Inquiry. These inquiries can impact a business's credit score and creditworthiness.

What are NAICS Codes and SIC Codes?

NAICS (North American Industry Classification System) Codes and SIC (Standard Industrial Classification) Codes are two systems used to classify businesses based on their industry. These codes can be used by lenders and other parties to assess a business's creditworthiness and risk.

What Are Business Credit Tiers?

Business Credit Tiers are a way of categorizing businesses based on their creditworthiness. There are typically four tiers: high, medium, low, and no credit. The higher the tier, the more likely a business is to qualify for favorable financing terms and credit limits.

What is a Business Credit Builder Program?

A Business Credit Builder Program is a service designed to help businesses establish and build their credit. These programs typically involve opening credit accounts, making timely payments, and working with credit bureaus to improve a business's credit profile.

Business Credit vs Business Loan: Which is Better?

Business Credit and Business Loans are two different ways of financing a business. Business Credit allows a business to access credit accounts and lines of credit, while Business Loans provide a lump sum of cash. Which one is better depends on the specific needs of the business, its creditworthiness, and the terms and interest rates available for each option.