People always get confused between business credit and personal credit. But the two have a common similarity in that when they are strong they could help you fetch better deals in the market, like help you qualify for lower insurance premiums or interest rates.
If your business is new, however, you may not need a business loan right away, but at some point, you may do. A common worry for most business people is figuring out how to best access business financing and credit. From startups to already established businesses, having a strong credit status for your business early on will help you make your immediate business decision and the future ones a success.
How to build a strong business credit
It may seem like a daunting task establishing and building your new business credit line, but if you follow the right steps, you will find out that it’s not. Soon after starting your business, you will likely need to sign a personal guarantee anytime you need to take out a loan for your business. Since your business doesn’t have any business credit score, the lender will use your personal score to determine your creditworthiness. This is also the case when you want to open a business credit card. What this means is that, in case you default on your business loan, you are personally liable for the debt. This is a situation that could risk your personal assets. Therefore, as soon as you start your business, it is important that you start building your business credit.
Now that you have a better understanding of the importance of building credit for your business, let us delve deeper into how you can build it yourself without the need for a business credit builder.
Separate your Business Credit From Your Personal Credit
Having a separate business credit history from your personal history helps you to minimize the effects that will result due to negative events one might have on the other. For instance, from time to time, you may have financial distress that will affect your personal credit that should not affect your business credit. It is important however to note that, unlike the personal credit reports, there is no legal requirement for the credit bureaus to give you free access to the credit scores you have established for your business. The three major business credit bureaus; Dun & Bradstreet, Equifax, and Experian will provide the credit report at a fee, but you can get a free copy from Experian and Dun & Bradstreet through Nav, which is a business credit builder.
Is business credit score just one?
Just like personal credit, there is no single business credit score, competing companies in the market have each created their models which they sell to businesses differently. FICO, Dun & Bradstreet, Experian, and Equifax all have their credit scores.
Incorporate your Business and Put it on the map
These are the first fundamental steps towards establishing a strong credit for your business. Even though you might be incorporated, it still deserves a mention that sole proprietorships and general partnerships have no separation of business credit from personal credit. Incorporating your business means forming an LLC, thus creating a business that is legally separate from the owners. This way, you can now start creating a new business credit line for your company.
Create Trust with Suppliers and Vendors
You need to understand that in the business world, trust is everything. Having a solid line of credit with industry-relevant vendors and suppliers is extremely important. Having positive relations between you and your suppliers will help you qualify up front, in terms of services and items. If you can be able to bag a line of credit or payment terms such as net-60 or even net-90 with your vendors, who can report such deals to credit reporting agencies, you can be sure to qualify for a business credit card for new business very fast.
Of importance to note however is that vendors and suppliers are not obligated to report to the credit bureaus, thus, you may need to be extremely proactive and open accounts that do. You can find some of the vendors that offer to report payments to credit bureaus and reporting agencies here.
Obtain a Federal Tax Identification Number (EIN)
This is like the Social Security Number for your business. If you want to have solid business credit, you will need to have one of these to change your business entity to a corporation. It is a necessity when it comes to federal tax filings. in order for your business to comply with the IRS requirements, most of the larger businesses will need an EIN from their vendors in order to pay them for the services they provided.
Get a Business Credit Card
When opening or applying for a business credit card, make sure you do that with a creditor that reports to the credit bureaus. This is one of the easiest ways to build credit. You can opt to have one open business card, but having more will not hurt. Nonetheless, be sure to use caution and avoid overextending your business finances. Remember, just because the credit is available through your card does not necessarily mean you should utilize all of it.
Monitor your credit
Many small businesses have reported serious errors on their credit reports. It is crucial that you diligently monitor your business credit history and this will help you spot early on any issues that are not accurate. Where you find an error that you cannot explain, file a dispute with the reporting agency.
Just like personal credit, building a business credit card for a new business from the ground up may take time which is why it is important to start this process early. It doesn’t matter if you need a business loan right now, establishing your credit right now will give you a safety net, and potential savings in the future.