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How to Build Business Credit Quickly (Step-by-Step)

business women put coin stack money and many bank note in office

How to Build Business Credit Quickly (Step-by-Step)

Building company credit plays an essential role in your business’s financing capability. Whether the business operates as a corporation or a limited company, it can have a different credit profile from yours.

Once a firm is registered (corporation, LLP, or LLC), it’s recognized as an individual legal entity that can enter into agreements — it’s regarded as a separate entity from you as the owner.

If the company operates as a sole proprietorship, it’s essential to know that there’s no financial or legal distinction between the business and the owner. When the owner applies for funding or takes out a loan, all activity will be connected to them, and it’ll be shown on their credit reports.

To keep personal and business finances separate, the first step is to start building credit in your business’s name. In this post, we’ll go over how to build business credit in ten easy steps.

What’s Business Credit?

Before we get into building business credit, let’s first define what business credit is.

Business credit refers to a firm’s perceived ability to meet its financial obligations as per its contracts. In other words, it conveys whether your company is a reliable borrower.

Business credit is built based on a company’s financial history. This means that how a business handles credit from lines of credit, loans, suppliers, loans, etc., is what builds its credit. Company credit is usually linked to the EIN (Employer Identification Number).

How Business Credit Works

One of the significant differences between personal credit and business credit is that a company’s credit is connected to your EIN. In contrast, personal credit is linked to your social security number.

Consequently, as you carry out various financial activities through your company — paying suppliers, opening a bank account, and getting a credit card — these details become part of the business’s credit history. Lenders report these details to credit bureaus that deal specifically with companies.

Equifax, Experian, and D&B (Dun & Bradstreet). Each of these firms gathers information from creditors and vendors you do business with and public records and legal filings. Then, they use a credit reporting algorithm to establish your company credit in the form of a number; this becomes your business credit ranking.

The company credit score will differ depending on the credit reporting firm, as each bureau has its technique for determining the score.

Nonetheless, the value will typically range between 1 and 100, with a higher score signifying your company is creditworthy, meaning it can repay a loan on time. Even though each credit reporting agency will have its assessment process, overall, your company’s rating will be influenced by:

  • Demographic information: Business size, industry risk, and years in business
  • Credit: Credit history length, credit mix, balances, payment history, credit utilization, and trends
  • Public records: Frequency and amounts associated with judgments, liens, and bankruptcies

As you’re figuring out how to build business credit, particularly if you’re just starting, actions such as mixing credit types, repaying loans on time, and not maximizing the credit limit will benefit your company’s credit profile and, ultimately, the credit rating. On the other hand, outstanding balances, current judgments, and missed payments will negatively affect your credit score.

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Image Credit: Shutterstock

10 Ways To Build Business Credit Quickly

Even though building business credit takes some time, taking control over your company’s credit profile will assist you in understanding it more and seeing how, with time, various actions impact your credit rating.

Thus, if you’re wondering how to build business credit quickly, there are some tried-and-tested methods you can utilize. These include:

1. Register The Business

The first step in building business credit is separating personal and business finances. You’ll need to register the company first to separate it from personal finances.

Unincorporated companies, i.e., sole proprietorship or general partnerships, are easiest to work with when starting out and when it comes to paperwork management. However, there’s no financial or legal distinction between the company and the owner; you must provide your social security number.

If you wish to create your business’s credit profile, opt for any of the following business structures:

  • S-corporation: These are pass-through organizations where company returns are only taxed at the individual level. They’re also seen as separate legal bodies
  • C-corporation: Gives you and your company financial and legal separation. Corporations are regarded as separate legal entities and are ideal for firms intending to go public at some point or issue stock
  • LLP (limited liability partnership): This is a registered business body standard in professional industries, like doctors and lawyers
  • LLC (limited liability company): This is another incorporated business organization with financial separation and liability protection. An LLC is more straightforward to manage than a corporation and provides more tax flexibility.

When structuring a business, the ability to build credit isn’t the only factor to consider. If you’re uncertain about the proper business structure, liaise with an accountant or business attorney.

2. Get An EIN (Employer Identification Number)

The EIN serves as the identification number for business taxes. The IRS uses EIN to monitor companies for tax purposes.

Single owner LLCs, partnerships, and sole proprietorships usually use the owner’s social security number as long as they don’t have employees. However, all other business types require an EIN.

One of the significant advantages of having an EIN is that it can help you build business credit. Additionally, an EIN is free, and it is simple to apply for one on the IRS website.

When you eventually take out a loan or apply for a business credit card, you’ll have to provide your EIN or social security number. If you don’t have an EIN, you can rely on your credit rating to assist you in qualifying and getting reasonable rates.

If you already have an EIN, your business credit will be tied to it, and you can use your business credit profile to qualify for business financing and credit products.

3. Set Up A Company Bank Account

In addition to selecting a business structure, setting up a company account is an essential step in separating personal and business expenses. Credit reporting agencies will see what finances you’re putting into and taking out of your company by opening a bank account. They will include this information in your business credit report.

Once you’ve got an EIN, you’ll want to explore your choices and set up a company checking account that suits your business. After setting up an account, ensure you use it frequently. That said, ensure you only pay for company expenses such as utilities. As long as you repay these purchases, it will contribute to establishing company credit.

Overall, setting up a company bank account will offer a bank reference for the credit bureaus and help you get better lenders in the future. The leading small business loan providers look for borrowers with companies with bank accounts that have been active for several years.

4. Have A Dedicated Phone Number And Company Address

A dedicated phone number and company address will solidify your company as a separate entity. This is a small but essential step towards building company credit as it allows you to register with company directories.

Business directories such as Angie’s List, Y.P. com, and Better Business Bureau require companies to have a phone number and address to sign up. Business credit bureaus gather information from these directories. Therefore, it’s essential to have consistent and accurate contact details listed on well-known directories.

In addition, when you open a dedicated phone number for your company, you’re creating your first, simple credit relationship with the phone firm. This history is usually reported to credit bureaus and will aid you in establishing business credit.

5. Register For A Company DUNS Number

Dun & Bradstreet is the most popular among the three credit reporting firms. Their paydex score is the company credit rating that most creditors and suppliers use. So, if you wish to build company credit, it’s advisable to set up a credit file with this bureau.

You’ll have to apply for a Data Universal Number System (DUNS). DUNS is a numerical identification protocol for companies. You’ll get a nine-digit code when registering for a DUNS. The application is free, and you can complete it on the D&B web page. It takes roughly one month to get your DUNS number.

Having a DUNS isn’t mandated unless you wish to apply for an SBA loan, grant, or federal government contract. However, it’s essential not to that the government doesn’t manage the DUNS system.

Everyone from international to national lenders and suppliers uses Dun and Bradstreet credit ratings. Therefore, if you’re attempting to establish a new company credit for your startup, ensure you register for a DUNS.

6. Create Trade Lines With Your Suppliers

Establishing and maintaining good relationships with suppliers and vendors is crucial in building business credit. Bringing in various lenders, vendors, and suppliers and maintaining a good relationship with them will assist you in establishing your company credit.

As you purchase supplies, inventory, or other goods from vendors, you can transform those purchases into relationships that can assist you in building company credit. It will be especially beneficial if vendors and suppliers extend credit, letting you pay some days or weeks after receiving the goods you order (NET 30).

While this credit isn’t from conventional lenders, it’s the same as taking out a loan. Paying the supplier or vendor in full and on time (or even early), then, will aid you in getting good company credit. This is similar to how repaying consumer loans assists in building personal credit.

7. Apply For a Line Of Credit Or A Company Credit Card

Most small companies and startups use credit lines and loans to finance their business growth and operation. This kind of credit is essential for the smooth running of a business, but also, using it will assist in building and establishing business credit.

You can start by registering for a company credit card to cover your business’s day-to-day expenses. Using a company credit card will also assist in solidifying the separation between your company and personal finances, further strengthening your business credit.

Moreover, a company line of credit operates the same way as a card, only that there’s no physical card. Instead, the lender credits the money to your company bank account, and you can make withdrawals on a need basis. You then repay the loan to reset your balance.

Eventually, this borrowing and repayment of funds on a company line of credit or credit card will aid in building credit as long as you’re repaying in full and on time.

If you have a bad personal credit rating or are just starting, it can be challenging to qualify for regular company credit cards. Try using and applying for secured company credit cards. These cards are usually “secured” by making a fund deposit against your credit card.

Additionally, consider leasing if you need equipment but don’t have the necessary finances or qualify for an advance. Leasing lets you get the gear you require and assists in growing your business credit rating.

8. Take Out Loans From Lenders That Report To Credit Bureaus

If you’re repaying your advances fully and on time, ensure you’re getting recognition for your stellar behavior and growing your business credit profile.

Always take out loans from lenders who report to the relevant credit bureaus. Ideally, loan providers should report to one or more of the three leading bureaus — Equifax, D&B, or Experian. Fortunately, this isn’t a concern with conventional lenders such as banks, as they regularly report to credit bureaus. However, some online lenders typically don’t file reports with these bodies.

Ensure you go through a financier’s policy before taking out a loan so that you can build your business credit.

pressing a Business Loan concept button
Image Credit: Shutterstock

9. Ensure Business Information Aligns With Credit Bureau Data

Every company credit bureau gathers information and has its scoring algorithms. Moreover, different lenders and suppliers report various kinds of information. Since a supplier or a lender can pull your business credit profile from any or all bureaus, you must maintain each credit file.

These companies let you update basic details such as the years in business and the employee numbers and upload financial reports.

Furthermore, it’s crucial to regularly review your credit reports from every bureau to ascertain no mistakes are affecting your ranking and to see your current status. Even the tiniest mistake can have a considerable impact on your credit rating.

If you aren’t using a monitoring tool or credit reporting service, an excellent unwritten rule is to verify your company credit profile every six months. If you find a mistake, you’ll need to confirm that the information is inaccurate and contact the relevant bureaus to inform them of the error and request the necessary alterations to be made.

10. Take Out Loans Responsibly

When you’re contemplating how to build business credit, your mantra should be the same as when you’re growing personal credit: take out loans responsibly. With constant proper borrowing and timely repaying habits, you’ll significantly improve your business credit rating.

Another factor you’ll want to consider is your credit utilization ratio, which is determined by how much credit you have compared to how much you’re using. For instance, if you have a $10,000 balance on a $20,000 credit, your utilization ratio is 50%.

The credit utilization ratio is a primary contributor to your business credit ranking. Keep it low to improve your business credit score.

Another method you can try is to increase your credit limit and not utilize it. This will help in decreasing your utilization ratio. Ensure you also space out a business loan or credit applications, as applying for many credit accounts over a short period can negatively impact your credit rating.

Your business credit ranking can also be affected if you have too much debt. Therefore, never take out more than you can handle. If you have problems managing debt, consider debt consolidation or refinancing to make repayments manageable.

Bottom Line

Building and establishing company credit is essential for businesses that want more freedom in how they finance their operations. Once you’ve followed all the steps listed in this article, all you have to do is optimize your credit ranking and apply for funding.

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