Savvy entrepreneurs often form Limited Liability Companies (LLCs) for asset protection benefits, and to legally separate their business finances from their personal finances. But that’s just the start.
There’s another step you’ll want to take after establishing your LLC: build credit for your LLC. Establishing an LLC and building strong business credit can help your business qualify for a wider range of small business loan options.
You want strong business credit for the same reasons you want a good personal credit history; you’ll have access to a greater number of financing options, you may qualify for lower interest rates, and good credit may even help you secure desirable working relationships. Where potential employers often check your personal credit during a background check, prospective partners or suppliers can check your business credit profile before deciding to work with your LLC.
What Does A Healthy Business Credit Profile Look Like?
Your business credit file can help lenders and other companies evaluate how your business has handled financial obligations in the past. A healthy business credit history will include information about your payment history on accounts that report. Those accounts should demonstrate an on-time repayment history, or close to it.
Balances on any loans or debts the business owes should be manageable, and there shouldn’t be any serious negative items such as collection accounts, bankruptcies or judgments. (If there are, they should have been resolved, ideally some time ago.)
Most lenders prefer to see no more than a couple open UCC liens on the credit report.
What Is The Fastest Way To Build Business Credit For An LLC?
You can begin to build business credit as soon as you form your business entity, even if you have a brand new business. You do that by doing business with companies that will report to business credit reporting agencies.
There are three major business credit bureaus:
These bureaus collect information about how business entities pay their bills. You’ll need to establish accounts with companies that report payment history to at least one of these bureaus then pay those bills on time.
Examples of types of providers you can use to build business credit include:
- Vendor accounts
- Business credit cards
- Business tradelines
- Credit builder accounts
- Business lines of credit
Not every creditor offering these types of accounts will report. Some do, and some don’t. So always be sure to find out whether on-time payments will be reported.
When you formed your LLC, you should have requested and received an Employer Identification Number (EIN) from the IRS. (You can request an EIN for free.) While an EIN isn’t required to build business credit, you should use one when you apply for small business loans or financing.
Before you apply for business credit, it’s a good idea to determine the address you’ll use for your business and to get a business phone number in your business name. Although this isn’t required, it can be useful for establishing the legitimacy of your business.
Get Nav’s free 15-step checklist for making your business legit here.
Setting Up Net-30 Accounts For An LLC
Of the credit-building options listed above, one of the easiest is to get net-30 accounts with vendors or suppliers. These are accounts with other businesses that will let you purchase items you need in your business.
Many vendors don’t require a good personal credit rating (they probably won’t even check your personal credit report), and typically don’t require a personal guarantee either. If your on-time payments are reported to business credit bureaus, you’ll start building good business credit.
It’s a good idea to have two or three net-30 accounts that you pay on time. Credit limits may be small to start, but that’s fine. Your payment history is what matters most when it comes to establishing creditworthiness.
After you have established vendor accounts, consider getting a small business credit card. Most small business credit card issuers report to at least one of the major business credit reporting agencies.
Understanding Payment Schedules
When you get vendor accounts, or any type of account that reports to business credit, it’s critical that you pay on time. With business credit, payments can be reported if they are just one day late. That’s because rather than grouping late payments into 30-day buckets as with personal credit, most use “Days Beyond Terms.” If you are just a couple of days late your payment history can be reported as 2DBT.
If you’re trying to establish good business credit scores, paying bills that report to your business credit reports on time is really important.
Know Your Current Business Credit Score
If your LLC has been established for some time, you may already have a business credit report. You can find out by checking your business’s credit for free with Nav.
The major business credit bureaus produce a variety of business credit scores. Dun & Bradstreet is well known for the D&B Paydex score, but there are other scores it sells. Experian sells the Intelliscore, and Equifax sells a variety of business credit scores. There’s also a FICO credit score for small businesses called FICO SBSS.
It’s not unusual for a business to check their credit and find out they have a good credit score with one credit bureau, and bad credit (or a low score) with another. That’s usually due to the fact that companies may not report to all three major credit bureaus.
Business Formation: Is Your LLC Structured Properly?
If you took the DIY approach to forming your business entity, you may not be aware of the myriad requirements to properly maintain it. Fail to take these steps and creditors may “pierce the corporate veil,” which means they may come after your personal assets in the event of a lawsuit against the business.
When it comes to the financial side of your business, a big risk many business owners take is mixing business and personal finances.
While it’s not uncommon for small business owners to use their own money to fund their business as startups, far too many run their business expenses through their personal bank accounts and use personal credit cards for business expenses.
According to a survey by Nav, 70% of small business owners without a business checking account were denied a business loan in the two years prior.
Two important steps for separating your finances are:
- Get a business checking account and use it for your business revenues and expenses. Pay yourself from the business then pay your expenses from personal accounts.
- Get a business credit card for business purchases. Avoid commingling business and personal credit accounts.
Getting Financing for Your LLC
One of the biggest benefits of establishing credit for your LLC is the ability to get access to more financing options. Some lenders simply won’t lend to sole proprietorships; your business must be its own legal entity.
At the same time, if you apply for financing for your business, you may be asked to provide your name and social security number or tax ID if you’re the authorized individual on the account. Some lenders will check personal credit simply to avoid red flags (such as serious delinquencies) while others will require good personal credit scores.
Nav can help you find the right financing for your small business. You’ll get connected to financing options based on your business data, allowing you to apply with confidence.