5 Ways to Build Business Credit

Business credit determines whether or not a company can land good funding for the business. Your company’s credit profile is entirely separated from yours, and it plays a significant role in building a company’s place in the market. Learn how to build business credit here.

What is Business Credit? 

Simply put, your business credit would tell if your business can handle its finances, debts, funding, and purchasing power. And just like your personal credit, business credit is always built over a certain time. 

Whether you operate as a sole proprietorship or a corporation, your firm can establish a distinct credit file from you.

Vendors, suppliers, and creditors often report a firm’s accounts and activities to a business credit bureau, producing a business credit report. This action assists in collecting the data for your business credit scores. Information from the owner’s credit file and company databases, such as the Small Business Financial Exchange, are also considered in some ratings.

Why Is It Essential To Build Business Credit?

Anyone may check your company credit, so lenders, suppliers, and even corporations may use it to determine whether or not to do business with you. 

Good business credit can help you qualify for small business loans and funding and get more favorable terms and cheaper interest rates. However, because firms are not required to tell you when your company credit is checked, you may not even realize how your credit history has impacted your business.

Simultaneously, a common misconception is that the owner’s credit will never be reviewed if a company has strong business credit. They will no longer be required to offer personal guarantees for a business loan. Many small company lenders check personal credit, and certain loans, such as bank loans or SBA loans, demand a personal guarantee.

It’s always preferable to have excellent credit, but it’s also crucial to understand how negative credit might harm your company when it comes to business credit. The capacity to get finance is the most important feature of corporate credit. 

You will not be able to get loans, credit cards, or other sorts of finances if you have poor credit. This may be disastrous for a startup on the verge of taking off. You’ll be well on your way to running a profitable business if you understand your score and keep it high.

How To Build Business Credit?

First, when keeping your business and personal money separate, you need to build your company’s business credit. Here are 6 easy approaches to help you build business credit efficiently.

1. Register Your Business

The majority of enterprises should be registered with their state. This stage should have been completed if you created a business entity in your state, such as an LLC or S Corp. Annual reports will almost certainly be necessary. 

If you started your company in another state, you might also need to register it in the state where you operate. You can file a fictitious business name with your state if you are a sole proprietorship or independent contractor who has not yet registered your firm.

In any scenario, professional or business licenses may be required. Read the rules in your state.

2. Get a Federal Tax ID Number (EIN)

You may apply for a federal tax ID for free using the IRS assistance tool. This is a nine-digit number that is issued to your business. You will use this number to file your company’s tax returns, create a business account, apply for licenses & permits, and while applying for business credit. Your EIN allows you to start building your business credit. 

3. Open Your Business Bank Account

You’ll need to create a business bank account for your business after obtaining your federal tax ID. This must establish a clear difference between business and your personal credits.

Your banking contacts are crucial to your company’s ability to get more funds. Your business credit account not only serves as a bank reference on credit card applications but also supplies significant information that lenders use during your financing approval process.

4. Establish trade lines with your Vendor/Supplier 

Applying for trade lines with vendors or suppliers is one of the simplest ways to build business credit for your company. Credit payments and purchases are reported to company credit reporting agencies when you buy inventory, supplies, or other stuff for your business on credit.

Request your supplier to submit your payments to a business credit agency if you have this sort of accounts-payable connection. As long as you follow the conditions of the trade agreement, your company’s credit score will improve.

A Dun & Bradstreet Paydex score, which assesses prior payment history, requires at least three tradelines. You may set up tradelines with any small vendor, such as your water or office supply distributor, even if you don’t work with many suppliers. 

If those merchants don’t report to a credit agency, you can use them as a trade reference on your account, and Dun & Bradstreet will contact them to obtain your trade information.

5. Pay Lenders On Time

The Dun & Bradstreet PAYDEX score, frequently used for company credit, spans from 1 to 100, with 100 being the best score. Your payment history with vendors determines your score.

Paying on time might get you a high score — up to 80 — if you pay on time. However, some company owners may be unaware that you must pay vendors on time to achieve the maximum PAYDEX score.

6. Monitor Your Business Credit Reports

Since there are 3 big credit reporting agencies, keeping track of each of your company’s credit files is key. Each agency gathers information from various sources and may have different details about your business.

The good news is that each business credit agency offers a method for you to modify basic information about the company. If you find any obsolete or inaccurate data, you should contact the agency to have it corrected.

Final Word

If you can build business credit for your company, you are more likely to land higher funding, better interest rates, and even better repayment terms on your loans. 

New accounts may take several months to appear on your company credit reports. Once they do, you’ll need to make on-time payments for several months to build business credit score. If you follow the steps above, whether you have a new or old firm, you will be able to obtain a strong business credit rating in a few months to a year.

To run a financially successful and healthy business, you must have a good business credit score. It demonstrates to lenders and other companies that your organization is financially stable and can meet important requirements. 

It will assist you in obtaining loans but also allow you to avoid prepayment. As a negotiating tool, a strong credit score might help you drive down costs or get better interest rates and conditions on financing packages from banks and online lenders.

Once your company is officially registered, the best approach to build business credit is to pay your bills on time – and earlier if possible. You may improve your credit rating by opening credit cards and maintaining your credit use below 30%. Maintain your company’s financial standing by regularly checking in with the major credit bureaus to guarantee your credit score is correct.