An accounting and financial expert’s guide to quickly establishing business credit.
We all know the importance of maintaining a high personal credit score. The same goes for small businesses, yet many owners rely on their personal credit for making purchases and qualifying loans. In fact, only 50 percent of small business owners that make credit purchases do so on business credit cards. This not only leaves you personally liable for your business but can halt your business’ growth and credibility.
The journey to an 850 credit score doesn’t have to be difficult. For many, it’s just a question of how to begin. That’s why we’ve provided this guide on how you can establish credit for your SMB.
Not All Credit Bureaus Are the Same
We all know that when it comes to personal credit, most credit bureaus are the same. This is because they follow the guidelines set by Fair Isaac Corp. to generate an individual’s personal FICO score.
When it comes to business credit, however, no credit bureau is the same.
Each company has its way of calculating scores. Vendors, banks, business credit card issuers, and trade associations each provide different information to bureaus. Maintaining a solid business credit score requires a work on the business owner’s part to ensure all information gets reported to the right bureaus.
Getting Started
Obtain the Right Business Records
So, what are the first steps you need to take to build your business’ credit? If you haven’t already, you’ll need to incorporate your business and get a Federal Tax Identification Number (EIN). Sole proprietorships, while great when starting off a business, leave you personally liable for your company’s assets and operations. In the event of a lawsuit or credit issue, your personal accounts and scores are impacted.
EINs are important because they serve as one of the main identifiers for your company. Credit bureaus use your EIN to register new companies, and lenders use it to conduct credit checks.
Apart from your Tax ID number, you’ll have to make sure your company’s filings and licenses are up to date. The Small Business Administration also recommends you list your company’s number in 411 directories so it’s easier for lenders to complete their verification processes.
Your First Business Account
With all your information together, you can go ahead and open up business checking accounts (keep in mind your EIN is also required for opening business accounts at a bank). From this point on, all business-related transactions must go through these accounts.
Your First Credit Account
Similar to checking accounts, opening business credit accounts should not be done in the name of the business owner. At this point, you should also open up credit files with various business credit bureaus. Dun & Bradstreet, Experian, Equifax, and TransUnion are the most used bureaus.
Your First Lender
With credit cards and credit files open, you can start establishing credit relationships. And who better to start with than your current suppliers? It’s important to choose suppliers that you’ll be working with frequently so you’re able to establish a long-term credit history with them (more on this later). Payment terms are typically established in intervals of 30, 60, or 90 days.
Providing Information to Credit Bureaus
Keep Information Updated
We already mentioned that different credit bureaus pull different information, yet not all information is correct or up-to-date. It’s recommended that you review your business credit reports once a year and review for errors. If anything is inaccurate, you’ll need to reach out to the bureaus for guidance on how to correct them (e.g. prove with evidence).
Trade Lines With Vendors
Establishing and maintaining solid credit relationships with your vendors and suppliers can improve your credit score. Ask them to submit your payments to business credit bureaus. According to NerdWallet, three trade lines are needed for scores with Dun & Bradstreet Paydex. If your vendors don’t report to credit bureaus, ask them to be a reference. Bureaus can then reach out to them directly for information on your business.
Borrow from the Right Lenders
When applying for a small business loan, make sure to apply with a company that reports to credit bureaus. If they don’t, your history of on-time payments will go unnoticed and have no impact on your business credit score. You should have your good history count for something, right? Vendors that do so include BlueVine, Lending Club, and QuarterSpot.
Maintain Solid Credit
Make Payments On Time
It should go without saying, but late payments will negatively impact your business’ credit score. All bureaus take payment history into consideration when determining your score. As with personal credit scores, a longer credit history weighs more favorably for the business. It’s also best to never go over 30 percent of your credit limit, as higher percentages can also negatively impacts your score.
Maintain Clean Public Records
Bankruptcies, judgments, and liens all negatively impact your credit score and can stay on your business credit report for years. Judgments affect your score if a court ruling was made against your business and you had to pay damages. Liens, or the legal right for a creditor (e.g. IRS) to seize the business property if payments aren’t made, can make it almost impossible to secure future loans.
Bask in the Benefits of Solid Business Credit
While we tend to think of credit scores only being good when applying for loans, solid business credit scores come with many benefits. Customers, suppliers, and others can view your credit report. Having a solid score, in other words, can attract new business. The stronger your credit score, the easier it will be to get better payment terms from suppliers, including the need to prepay for goods.
Simply put, having a strong business credit score can only help the growth of your business. As a business owner, getting your score to 850 is just another challenge you should be excited to overcome.
