Building your business credit will allow your company to expand when the time comes to get financing. Many lenders will want to see some type of business credit. In this article, we'll see several ways you can start building business credit.
Also, check out the 5 C's of business credit for what it means to have good business credit.
Business Credit Is Different From Personal Credit
When building business credit, it is very different from your individual credit. With personal credit, much of it is made from credit cards, car loans, and mortgage payments. Credit bureaus use this information to generate what's called a personal credit score, which is one of the main factors in determining if you get any new personal credit.
Business credit is done mostly through payments via trade lines. Business lines usually come in the form of suppliers and vendors extending your company a revolving line of credit. For these payments to show up on your business credit, you have to request that each supplier submit your on-time payments to the credit bureaus. Unlike with personal credit, they aren't required to do so. This is why it's important to ask that they submit to credit bureaus for you.
As you can see, this is very different from personal credit, where much of everything is done automatically.
The main credit bureaus for business credit are Experian, Dun & Bradstreet and Equifax. Credit scores for businesses aren't the same as those for personal credit. In general, higher is still better, but business credit scores only go up to about 100, whereas personal scores can go up to 850.
Register Your Company
You want your business to be entirely legitimate before building credit. Meaning, registering with the proper regulatory authorities. This includes your county or city, possibly the state, and federal government.
The federal government will provide you with an EIN or an employer identification number. An EIN for your business is like a social security number for a person.
Having a business phone number can help when lenders begin looking at the legitimacy of your business. Have the number registered in a directory as well.
Open a business checking account. This will help in separating business funds from personal.
Transitioning from a sole proprietor to a corporate structure (LLC, S-Corp, C-Corp, etc) can have a positive impact on lenders. These business structures create a separate entity for the firm. This helps to separate your business credit from your personal credit.
Register your business with Dun & Bradstreet. This will give it some visibility when suppliers or vendors try to look you up on Dun & Bradstreet's website. Once registered, your business will have a D-U-N-S number. This number identifies you with D&B and is also used for your credit file.
As well, you can register your business with Experian and Equifax.
Maintain A Good Personal Credit Score
While you're focusing on building business credit, don't neglect your personal credit. Some business financing companies will factor in personal credit scores. If you have great business credit but don't have a good personal credit score, it can limit your ability to get business financing.
Using Business Credit Cards
Business credit cards are an excellent way to build business credit. Unlike trade lines, they also have more automated methods of reporting your payments.
Even if you don't have a business credit card right now, opening an account and making consistent payments will build your business credit. When the time comes, your business credit history will be available.
When choosing a business credit card, pick one that has a rewards program you'll take advantage of. This provides some additional return when using the credit card.
In general, business credit cards don't have as many rewards program options when compared to personal credit cards. But there are still some rewards programs available.
Monitor your credit card usage and due payment dates. Allowing a payment due date to slip will only hurt your business credit. Also, try to pay the balance off each month to avoid paying interest and building up short-term debt.
Some retailers such as Staples and Home Depot offer business credit cards. Before opening an account at one of these retailers, be sure they consistently report to the business credit bureaus.
Choose Lenders That Report To Credit Bureaus
Not all lenders will report to credit bureaus. Even when asked, there's no guarantee a lender will actually follow through. Check if the lender already does credit bureau reporting when loaning to businesses. If the lender does, they should be one of your first choices.
Shorter-term, higher rate lenders such as OnDeck, Fundbox,
Public Records Can Impact Your Business Credit
Public records such as bankruptcies, liens or judgments against your business can have a negative impact on your business' ability to get financing. The above types of public records can also hang around for a long time.
Bankruptcies can stay on your record for ten years while liens, collections, and judgments can be seven years.
Using the tips outlined in this article should get you off to a great start on building your business' credit.