If you own a business, building a strong credit score can be crucial for its success. Do you want to get loans and lines of credit to be able to expand without using your cash flow? Building your business credit is the first step to be able to do this. In this article, we will discuss seven strategies that can help you build your business credit score.
1. Establish Your Business Entity
The first step to building business credit is to separate your business and personal finances. This means creating a business entity (such as an LLC or corporation), getting a business bank account, and using a separate credit card for business expenses. By keeping your personal and business finances separate, you’ll build a strong foundation for your business credit profile.
2. Obtain your EIN/Tax ID
A Tax ID, also known as an Employer Identification Number (EIN), is a unique nine-digit number that is assigned by the Internal Revenue Service (IRS) to identify your business for tax purposes. It is required for businesses that have employees, operate as a corporation or partnership, or file certain types of tax returns.
To get a Tax ID or EIN, you can apply for one online through the IRS website here. The application process is free, and you should receive your EIN immediately upon completion. Having a Tax ID or EIN is important for establishing business credit and for filing taxes for your business.
3. Register for Your DUNS Number
A D-U-N-S Number is a unique 9-digit identifier for your business. It is used by credit reporting agencies to track and report on your business credit activity. You can get a D-U-N-S Number for free from the Dun & Bradstreet website, which is the largest provider of business credit reports. Having a D-U-N-S Number is essential for establishing business credit.
4. Monitor Your Business AND PERSONAL Credit Reports
Even though the goal is to eventually build business credit that is separate from your personal credit, it’s important to know that some of the cards, in the beginning, will still need to see your personal credit to offer you credit.
Don’t let that discourage you if you have bad personal credit. You can still build business credit separately, but it will take more time than if you can start quickly using your personal credit as a guarantee for higher-end cards and lines of credit.
You can obtain a free copy of your credit report once a year from each of the three major credit bureaus: Experian, Equifax, and TransUnion. Or use a service like MyFico for your Fico score and credit report monitoring.
Review your credit report regularly to make sure there are no errors or fraudulent activity. If you find any errors, you can dispute them with the credit bureau to have them corrected.
6. Establish Trade Credit
Trade credit is when a vendor or supplier extends credit to your business, allowing you to purchase goods and services on credit terms. By establishing trade credit and paying your bills on time, you can build a positive payment history and improve your credit score.
To establish trade credit, start by working with vendors or suppliers that report to the credit bureaus. You can also ask for trade references from your existing vendors to help you establish credit with new suppliers.
7. Apply For Business Credit Cards
Here’s where it gets really interesting, now that you have the basics in place it’s time to apply for the credit cards from banks and credit unions.
It’s important to note that the first place that you should apply to will usually be the bank where you have your main business account. Your bank can see business revenue. This makes it easier for them to trust you and underwrite your account.
Local credit unions are also great places to apply to. They have been known to be more friendly to new business owners and also offer great rates and services.
Once you have a couple of cards in good standing and some revenue flowing you can aim at applying for business lines of credit, loans and more from these same institutions. We will cover this in other articles.
Final points about building business credit
These are the basic steps to help you build your business credit score. You must not skip any of these steps. You can do more, of course, but this is the core. If you do these in order you can expect to have a solid foundation for getting the loans and credit that you need to expand your business and grow. Before we end this article I want you to remember one thing, pay your bills on time. None of this works if you don’t do that. Good luck!