Establishing business credit is one of the most important steps in keeping your business cash flow healthy. Below we flesh out the best ways to establish and keep good business credit.
According to the SBA, access to cash and credit is a business’s lifeline. Business credit allows a company to borrow money that can be used to purchase products or services. Just like any other types of credit and loans, it is based on the trust that payment will be made in the future.
What is Business Credit?
Business credit is the ability of a business to qualify for financing. Just like personal credit, businesses have credit reports and scores as well. Business credit reports can be used by lenders, creditors, suppliers, insurance companies and other organizations like such that evaluate a credit or insurance application or business deal.
Establishing business credit is an incredibly important step for every new small business. There is a difference between business credit and personal credit and they aren’t linked. Even if your personal credit isn’t ideal, having business credit could help provide some benefits even if you don’t plan on taking out a loan for whatever reason.
Establishing business credit, with a separate legal entity (like a corporation or a limited liability company (LLC)) provides the ability to create a credit identity with business credit reporting agencies.
However, if you’re a sole proprietor, banks and lenders are more than likely looking at your personal credit in order to see how well you are able to manage debt and your payment history. This is most likely going to happening when opening a business credit card or trying to take out a small business loan.
Establishing business credit is an important step for any new small business and helps you to: (1) maintain a credit history separate from your personal credit history and experience the business benefits of having good business credit, and (2) it demonstrates a separation between the owners and the business
Why separate credit histories?
By having a business credit history separate from your personal one, you can minimize the effect negative events one might have on the other. For example, if you have some financial missteps that impact your personal credit history and score, they shouldn’t impact your small business credit if you have established a clear separation and vice versa.
Why separate business and owners?
Unless you’re operating your small business as a sole proprietorship or general partnership, you need to demonstrate that the business is separate from the owners. One of the key benefits that corporations and limited liability companies (LLCs) provide the owners is protection of their personal assets. Keep this protection in place by consistently showing clear separation between the owners and the business.
Eight steps to establishing your business credit
- Incorporate your business. Even though you may be incorporated when you’re reading this, it deserves a mention. With sole proprietorships and general partnerships, the business is legally the same as the owner; therefore, there can be no separation of business credit history from personal. Incorporating a business or creating an LLC helps create a business that is then legally separate from the business owner(s).
- Obtain a federal tax identification number (EIN). The EIN is basically a social security number for a business. It is required on federal tax filings, and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.
- Open a business bank account. Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.
- Establish a business phone number. Whether you use a landline, cell phone or you use VoIP, have a separate number for your business and in your business’ legal name. List that number in the directory so it can be found.
- Open a business credit file. Open a business credit file with all three business reporting agencies: Experian, Equifax and TransUnion.
- Obtain business credit card(s). Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies. This could be just a credit card from a store like Lowe’s or Home Depot, as long as it is in the business’s name
- Establish a line of credit with vendors or suppliers. Working with at least five vendors and/or suppliers can create credit for your company to use when purchasing with them. Make sure to ask that they report your payments to credit reporting agencies.
- Pay your bills on time. This should almost go unsaid, but make sure that you pay your bills on time. Just like with your personal credit, late payments can negatively impact your business credit as well.
An important extra step is also to monitor your business credit. Along with keeping up with your personal credit, it’s incredibly important to keep an eye on your business credit to make sure that there are no errors on your report that could negatively effect your business.
Benefits of having good business credit
Having good business credit can have a multitude of benefits, including:
- Positioning your company for more favorable payment terms with new vendors and suppliers.
- Limit the amount of repayments you need to make for products or services you purchased.
- It can help you potentially get better interest rates and credit terms from lenders and banks.
Once you have established and built good business credit, be sure to monitor and protect it, just as you do with your personal credit. Monitoring is vital with both kinds of credit to make sure everything looks right and is up to date.
How to Build Business Credit
After establishing business credit, it’s important to build strong credit now. There are two steps that can help boost your commercial credit history.
The first step is making sure you pay the bills early. Paying on time is important, but with some business credit scores, paying early can essentially give you “extra credit” and it can then help build your score quicker. The payment information on a business credit report is usually much more detailed than your personal credit report.
The second step is to make sure that you have any accounts reporting to the various business credit agencies. Checking your reports consistently can help you figure out if it’s being reported and helping your business credit.
Just like with personal credit, a smaller amount of credit utilization is more preferable from lenders. Some lenders would prefer to see less than 30% of your total available credit being used before they approve you for additional financing.
Why is Learning How to Establish Business Credit Important to Me?
There are a lot of benefits to having good business credit set up for your small business, just like having good personal credit.
A good business credit score has the ability to help you obtain better interest rates on loans, decrease instances where you’d have to repay for certain products and services, and it helps secure better trade terms with important suppliers for your business. Having good business credit helps you save money, keep cash flow liquid, and access the funds or the assets to help make your business grow.
What are Some of the Types of Credit I can Apply for with Newly Established Business Credit?
There are several basic types of business credit that one can acquire from a newly started business or even an existing business with little or no credit identity established. These are:
- Vendor Credit – This type of credit is when an individual or business offers products or services that your company can purchase on short term financing. Plenty of vendors are willing to extend credit to startups with minimal requirements. Some vendors may require an initial purchase or deposit before extending credit terms though.
- Supplier Credit – This type of credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This kind of financing is good for trying to conserve your cash flow since it gives you time to sell the products before having to pay for them.
- Retail Credit – A lot of brand retailers offer some type of store credit cards for business, like mentioned previously. These types of cards can typically only be used at a certain store. This type of credit makes sense if you plan on using a certain store regularly for business purchases.
- Service Credit – This is the easiest form of business credit you can establish for the first time. This type of credit typically consists of your internet, cell phone, cable, satellite tv, web hosting, and other utility services.
- Business Credit Cards – These were mentioned a little bit previously in the article, but these are one of the most important tools in order to keep your personal and business purchases separate in a secured (or unsecured) business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so that you can protect your personal credit as well.
There you have the basics in establishing good business credit.
