10 Easy Steps To Establish and Improve Your Business Credit
Have you ever used personal credit to secure business financing? If you have, you’re not alone. A 2020 survey by the Federal Reserve found that 88% of employer firms said they relied on the personal credit score of an owner to obtain financing.
This is typical for businesses in the early startup stage, where personal credit is needed to convince lenders, partners and suppliers to do business with you. But as your business is up and running it’s advantageous to have a separate credit rating. Here’s a comprehensive 10-step guide to establishing and building your business credit.
Establish Business Credit
1. Register your business
Choose a business structure (LLC, S-Corp, etc…) that best fits your company type. If your business is a sole proprietorship, it will be harder to keep your business and personal finances separate. This means it’s more difficult to develop a separate credit history for your business.
2. Obtain an Employee Identification Number (EIN)
Apply for a 9-digit Employer Identification Number (EIN) with the IRS. This 9-digit number is like a Social Security number for businesses. Many lenders require an EIN to qualify for a business credit card or business loan.
3. Obtain business licenses and permits
Make sure to obtain the proper licenses and permits to comply with local, state and federal regulations. Many lenders and organizations may require proof of business, and these documents can help. Ensure you’re using the same exact wording for your business name across all documents.
4. Open a business bank account
It’s helpful to separate your personal and business finances for all types of accounting, taxes, and credit purposes. You can start by opening a business bank account under your business name rather than your personal one. After your account is created, begin using it for all business expenses and deposits. Creditors may ask to see bank statements when determining your eligibility for a loan.
Pro tip: If you have an existing business loan under your personal name, check with your lender to see if you can transfer it under your business name.
5. Establish a business credit file
To better build and manage your business credit, register with business credit bureaus. These are bureaus that establish credit scores for businesses rather than individual people. The most widely recognized business credit bureaus are Dun & Bradstreet, Experian Commercial, and Equifax Small Business. Make sure they have complete and accurate information on your business, including your EIN. Keep them updated on any changes, such as a new address or contact information.
You may be wondering what is a good business credit score. To find out you’ll need to check with each of the reporting agencies. Their scoring systems vary with some that range as high as 992, and others that only range up to 100.
Improve Business Credit
6. Establish trade lines with suppliers and vendors
Apply for vendor credit with businesses that report to business credit bureaus and make purchases from them under your business name. Consider applying for a business credit card through your bank, or research other credit card options that fit your needs.
7. Maintain a good credit utilization ratio
Having available credit is good for your credit score, while maxing it out is not. In general, keep your credit usage, which includes any business lines of credit and business credit cards, to a maximum of 30% of available credit.
8. Ensure your payments are reported
Ask the vendors you purchase from if they report your transactions to any of the business credit bureaus. Not all companies do this so you may have to ask. Building a record of on-time payments does you no good if the credit bureaus don’t know about it.
9. Pay your bills on time
It may sound obvious, but it’s worth mentioning. Paying all of your debts on time—including payments to utility companies, vendors, landlords, credit-line payments and business credit card companies—is critical to building a strong business credit rating. Set your business bank account up for automated payments where possible, and use calendaring systems to remind you well in advance of payment dates.
10. Check Your Business Credit Reports Regularly
At least once a quarter, check your business credit rating with each of the three credit bureaus. If you spot any errors or inaccuracies, take steps to correct them. You’ll also be able to see if your credit rating is declining for legitimate reasons, such as late payments or overused credit, and change that behavior.
These 10 steps can help you establish and improve your business credit, ultimately improving your company’s financial standing and growth opportunities.
