If your business is new, you may not be thinking about taking out a loan just yet, but the day may come when you do.
Figuring out how to access business financing and credit is a common quest for both new and existing small business owners. From startup costs to new expansion strategies, establishing a strong business credit profile with diverse accounts early on can help make your immediate and future business plans a success.
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Build business credit faster
*When you sign up for a free Nav account, you'll get access to your business credit reports and scores. Checking won't hurt your credit scores. Paid Nav accounts help you build business credit by creating business tradelines.
By clicking "Sign Up" above, you confirm that you accept the Terms and Conditions, acknowledge receipt of our Privacy Notice and agree to its terms.
Eight Steps:How to Establish Business Credit
- Put your business on the map
- Maintain good credit with suppliers and vendors
- Obtain an employer identification number (EIN)
- Pay on time all the time
- Open a business credit card
- Get incorporated
- Separate business and personal expenses
- Monitor your credit
Establishing business credit isn’t complicated, but it does take some planning and forethought. The sooner you start, the sooner your credit will start to build.
This article will walk you through steps you can take to establish your business credit so that if and when you’re ready for financing, your business is well-positioned to not only get approved for a business loan, but also get great terms on it.
What is Business Credit?
Business credit is the ability of a business to qualify for financing. Businesses have credit reports and scores just like people do. Business credit bureaus Dun & Bradstreet, Experian, and Equifax all keep a record of debt payments and other credit information on businesses.
Your business credit report may be used by lenders, creditors, suppliers, insurance companies and other organizations evaluating a credit or insurance application or business deal.
These tips on how to establish business credit and then build a business credit profile can help you bring your plans and aspirations to fruition.
Let’s look at each of these steps in depth.
1. Put Your Business on the Map.
Just because you’re open (or about to open) for business, doesn’t necessarily mean you’ve put yourself on the map. You can’t effectively establish credit until you’ve established your business! Get a business phone number and have it listed in the directory. Every credible business should have one. You’ll also want to open a business bank account in your official (legal) business name, and regularly use it to pay your bills. You need to open a business credit file in order to establish business credit.
2. Establish and Maintain Good Credit Relationships with Suppliers and Vendors.
In the world of business, a solid line of credit with industry-relevant vendors or suppliers is like gold. The better your relationship, the more likely you are to avoid paying up front for items or services. If you can secure a line of credit or payment terms such as net-60 or net-90 with just a few (3-5) vendors or suppliers that report those payments to business credit reporting agencies, you can establish a positive business credit history.
Your vendors aren’t required to report to credit bureaus, though, so you may need to be proactive and open accounts with those that do. Here are three vendors that report payments to business credit bureaus and reporting agencies, and that are flexible when extending credit.
3. Obtain an Employer Identification Number.
A Federal Tax Identification Number, or EIN, is like a Social Security number for your business. You’ll need one of these to change your business entity to a corporation, and you may need one to open a bank account under your business’s name or secure business contracts.
4. Pay on Time All the Time.
This is probably the number one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. A late payment history, especially severely delinquent payments, will bring down your business credit rating and negatively impact your business credit profile.
5. Open a Business Credit Card.
Opening a business credit card with a creditor that reports to the major credit reporting agencies is a great way to establish business credit. You definitely should have at least one open business card, but more than one can also help. However, be sure to use caution and avoid overextending your business finances. Just because the credit is available through your business credit card doesn’t mean you need to (or should) utilize all of it. (Find business credit cards that match your credit file using a free Nav account.)
6. Get Incorporated.
If you haven’t already, seriously consider getting incorporated or becoming an LLC. By adding Inc. or LLC to your business name, you’ll be legally separating your business and personal credit profile and assets. If you choose not to do this and continue to operate as a sole proprietor, your business and personal credit history (among other things) will be legally attached, and your personal assets might be at risk should you ever be sued.
7. Separate Business and Personal Expenses.
Given the steps above, this is fairly redundant, but nonetheless important. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be separating your business and personal expenses. Make sure to only spend money from your business checking account rather than your personal when it comes to business expenses. Clearly separating your personal from business expenses also makes it a lot easier to manage taxes!
8. Monitor Your Credit.
25% of small business owners have reported significant errors on their credit reports. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency. (Sign up for Nav to get an alert when your business credit profile has been created with Dun & Bradstreet or Experian.)
How to Build Business Credit
Once you have established business credit, your next step is to build strong business credit. Many of the steps above will help you do just that, but it’s important to focus on two specific steps to help you boost your commercial credit history.
The first step is to pay bills early. In the advice above, we mentioned how it’s important to pay on time. But with some business credit scores, you can, in essence, get “extra credit” for paying your bills before they are due. Payment information on your business credit report is often more detailed than on your personal credit report. Pay faster if you can, and you may build your business credit score more quickly.
The second piece of advice for building good business credit is to make sure you have accounts reporting to the various business credit agencies. Again, not all vendors and creditors report to all commercial credit agencies. For example, your business credit card issuer may report to SBFE but not to D&B; you won’t know until you check your reports.
So be sure to check your credit reports and scores with more than one major credit reporting agency to find out whether your accounts are helping your scores, and if not, consider adding additional credit references. With Nav’s Business Loan Builder subscription, you’ll see your business Experian Intelliscore, D&B Paydex Score, and your FICO SBSS score.
Also, keep an eye on your credit utilization. Some lenders want to see less than 30% of your total available credit used before they approve you for additional financing. Keep an eye on your credit limit across all credit cards, and make sure you’re using 30% or less of what you have access to to increase your chances of getting approved for a business loan.
Why Should I Learn How to Establish Business Credit?
If you’re reading this, you already know that good credit (both consumer and business) is important for the future of your venture, but let’s explore the benefits a bit more.
A strong business credit score can help you secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry. In the long run, this will help you save money, keep cash flow liquid, and access the funds or assets you need to help your business grow. Adversely, having bad business credit can limit your ability to secure financing. (Nav customers can use the BusinessLauncher tool in their free account to start building a business credit profile.)
In fact, one of the primary reasons business owners are denied funding is due to a failure to understand their credit. Nav’s Small Business American Dream Gap Report found that nearly one in four businesses don’t know why their loan applications are denied, yet businesses that understand their business credit scores are 41% more likely to get approved for a small business loan.
Additionally, a big issue with financing a business is dealing with personal guarantees. A personal guarantee is a promise from a business owner that they are responsible for their business’s debt should the business be unable to pay the debt. 86% of businesses use their owners’ personal credit to fund their entrepreneurial dreams, and establishing business credit can help you draw a clear and important line between your personal and business finances and mitigate the need to sign a personal guarantee for business funds.
Now that you understand the importance of having good business credit, make establishing it and building your business credit a priority. Bake your credit-building strategies into your business plan and keep tabs on your credit report to ensure that your credit scores are soaring.
Whether you need a loan right now or not, good credit practices are a great foundation for a successful small business.