Growing a small business isn’t easy.
However, the few businesses that do make it over the hump and experience rapid growth are then hit with a new set of problems.
Where can we get the money to support this growth?
When it comes to growing a business, especially on a rapid scale, one may not have the necessary funds to rapidly scale their operations.
This is where good business credit can come to the rescue.
In the below article we’re going to go over how to build business credit.
How to Build Business Credit in 9 Steps
Having good business credit can help you gain favorable rates and terms when working with vendors and suppliers. This will save you thousands of dollars in the process.
When first starting out, it might seem like a bit of a catch-22. You need good business credit to gain favorable rates, but how can you do that without any business credit?
Luckily there are a few ways you can establish and build your business credit.
Below are the 9 most important steps when it comes to building business credit.
1. Incorporate Your Business as a Separate Entity
The most important step to establishing and building your business’ credit is that it must be its own legal entity. You must keep it separate from your personal credit history. This can ensure that there are no legal and financial mix-ups of your personal and business affairs.
By default, if you were not to incorporate at all, your business would be a sole proprietorship, which holds you responsible for any liability. It also uses your personal credit as a means of obtaining any loans.
If your personal credit isn’t the best, then you’d be hard pressed to find any bank that will offer you any kind of loan, let alone one with a favorable rate.
Some common options you have when it comes to incorporation include the following:
- Limited Liability Company(LLC)
- S-Corp
- C-Corp
There are different benefits and drawbacks to each one. The incorporation process in any of these differ by state, so you’ll want to check with an attorney in your area to ensure you incorporate properly.
The benefit of having a separate entity from you is that this will allow you to build a completely separate credit history for your business, regardless of your personal financial situation.
2. Retrieve an Employer Identification Number from the IRS:
Once you’re finished incorporating, you’ll want to have the IRS issue you an Employer Identification Number, or EIN for short.
An EIN will give you privileges only available to businesses. You can use this number for things like opening a business checking account or credit card.
Some people use their SSN as their EIN when applying to checking accounts, savings accounts, or credit cards. This might be good at receiving the credit when you first start, but it can complicate things as you grow.
Having a dedicated EIN will set the best practice of keeping everything separate from your personal affairs.
You can apply for an EIN online at the IRS website.
3. Register with Dun & Bradstreet and get a D-U-N-S Number
You will want to register your business for free with Dun & Bradstreet, as this will establish a credit profile with them.
Dun & Bradstreet is a reputable company that keeps track of companies business credit profiles on a global scale.
They are one of the major business credit reports that can make or break your ability to secure and maintain contracts, lines of credits, etc.
You’ll then want to get a Data Universal Numbering System(D-U-N-S) number, as this is a global system where D&B keeps track of businesses of all types.
Getting this established from the beginning will allow you to build credit over as long a period of time as possible.
4. Open up Two Business Bank Accounts
We alluded to this a bit earlier, but once you retrieve your EIN from the IRS, you’ll be able to open up a business bank account.
The two bank accounts you’ll want to open up are one checking and one savings account.
A checking account will allow you to record your finances for your bookkeeper or your CPA come tax time. It will be easier to expense things if you use a separate account only for business expenses.
You can open a business checking account using the name of your business, your DUNS number, business address, and/or your EIN.
Once you open up a checking account, you’ll also want to look into opening up a business savings account for emergency expenses.
Fill up both accounts with however much you have to quickly establish a relationship with your business bank.
You may want to hire a bookkeeper or a CPA to ensure all your business-related bills transfer over to your new business bank accounts.
A bookkeeper can help you reconcile all your business expenses. Your CPA can give you a nice financial road map and can be an advisory resource when it comes to when you should apply for business financing.
5. Open Up Vendor Accounts:
Once you’ve opened your accounts, you’ll want to apply and open up for any applicable vendor accounts.
There are many vendor accounts that can help you build your business credit profile, depending on the type of business you run.
For example, if you use a lot of shipping materials, consider opening a Uline account. You’ll need references, statements and a DUNS number, among other things, to establish an account with them.
Other vendor accounts might include utility bills, local office supply stores, and suppliers or vendors you currently work with.
A simple phone call or a web search can help determine where you can establish these vendor accounts and what the terms are.
Having a mix of different vendor accounts shows a healthy, diverse portfolio of different credit lines. This further increases the favorability of your business credit profile.
You’ll also want to ask suppliers to report your payment history to the various business credit bureaus like TransUnion, Equifax, and Experian. Also, see if they can help your Dun & Bradstreet credit profile as well.
6. Get a Business Loan
Assuming it makes financial sense, you’ll want to get a business loan using the savings account that you have with your bank.
When you secure a loan with your business bank, you’re building a credit history and a relationship with this bank.
Using the money in your business savings account to fund the loan shows the bank that you have the means to pay them back.
This instills confidence in them that you are a responsible business owner who is more likely to pay back the loan.
Once you establish a healthy relationship with your business loan, you can negotiate rates or refinance with your bank.
It would be best to establish a relationship with a person. Getting to know your account manager can give you more leeway and flexibility when negotiating.
Like vendor accounts, you’ll want to ask your bank or whoever you’re retrieving the business loan how often they report to the credit bureaus.
Ideally, you’ll want to work with a bank that reports regularly, maybe every quarter vs. every year. This will help you in the coming months to show that you’re a responsible borrower.
7. Open Up a Business Credit Card
You’ll want to open up a business credit card with benefits that pertain to whatever your business does.
You’ll want to use this responsibly. Watch your expenses, don’t spend more than you can afford. Keep your utilization ratio below 30%. Pay your bill on time and in full, like you would with your personal credit card.
You’ll want to use your business credit card for everyday expenses, and your loans for larger purchases.
If you are in the beginnings of your business, or your business credit took some hits and isn’t the best at the moment, look into establishing a secured business credit card.
This will allow you to put a certain amount of money as a line of credit onto a credit card, which can help build your business credit.
Once you’ve used it responsibly and paid it in full and on time, it will convert into an unsecured line of credit over time, usually anywhere from 6 months to a year.
8. Monitor Your Business Credit Reports
Like your personal credit report, you’ll want to ensure that you keep a pulse on all your business credit reports.
Keep track of any new lines of credit or any discrepancies or errors found in your business credit report.
As mentioned above, the main business credit bureaus are Experian, Equifax, and TransUnion. You’ll also want to keep track of your Brad & Dunstreet profile.
It’s important that you check these every quarter and make sure that everything is up to date and in tip-top shape.
If you end up finding any, you’ll want to contact the appropriate credit bureau to try and dispute or remove the error.
Monitoring your business credit reports is a preventative measure. You wouldn’t want to get a loan rejected when you need one the most. It’s important that you’re proactive about keeping tabs on your business credit report so that you don’t have any unexpected surprises.
There are also industry-specific credit bureaus that you can register and report to. This can establish you in a much more industry-specific way, and it can only help you build trust with the vendors, suppliers, and buyers in your industry.
9. Don’t Ignore Your Personal Credit
With all this talk about business credit, you won’t want to forget to build and maintain your personal credit.
Having poor personal credit will make it much harder to establish business credit, especially if you’re only starting out.
Luckily, any activity in your business credit(assuming you’ve incorporated and are operating under a separate entity completely) won’t report to consumer credit agencies, which is why it’s important to keep everything separate.
However, when starting out you’ll definitely want to check your current personal credit situation before trying to establish business credit.
If you’re currently dealing with poor personal credit, you’ll want to talk to the bank you have the best relationship with and discuss your options for obtaining business credit.
It Won’t Happen Overnight
Once you’ve established everything we’ve talked about, it’s only a matter of staying responsible and building your relationships and reputation through each of these avenues over time.
Once you establish your initial “seed funding” in credit lines and vendor accounts, continue to apply for additional credit lines where you see fit.
The larger your line of credit, the more flexibility you have as an owner with a growing small business.
When you start to build business credit, a lot of it comes down to responsible management over a long period of time.
Your relationships will also be key to establishing favorable rates. Building real, human connections with your vendors, suppliers, your bank, customers, buyers, and lenders can lead to compounding benefits in the long run.
See If You Qualify for a Small Business Loan
Hopefully, you understand how to build business credit a little better now that you’ve read this article.
Even if you don’t have all the above already set up, beginning the process of setting the above accounts can put you in a good position when applying.
If you’re interested in seeing if you qualify for a small business loan, click here to apply now.