How to Build Business Credit: A Guide from Global Pacific Advisors

Understanding Business Credit

Business credit plays a crucial role in the financial health of your company. It affects everything from insurance rates to loan interest rates and vendor negotiations. Building business-credit is essential for managing cash flow and ensuring the longevity of your business. Unlike personal credit, business credit is developed separately to protect both you and your company. Here’s a comprehensive guide to understanding and building your business-credit.

What is Business Credit?

Just as individuals have personal credit scores, businesses have their own credit scores. Agencies like Dun & Bradstreet, Equifax, and Experian track and record credit activity, including open lines of credit, loans, and debt payments. This information is crucial for third parties assessing your business’s credibility and financial stability.

Your business credit report can influence:

• Creditors
• Lenders
• Suppliers
• Banks
• Landlords
• Insurance companies

A solid business credit profile can mean the difference between loan approval and rejection, or even impact the terms of a lease agreement. Building and maintaining good business credit is vital for your long-term success.

Who Needs Business Credit?

Every business owner should establish and maintain a busines-credit score. Keeping your business finances separate from personal ones is crucial, especially in the event of legal issues or loan defaults.

Business credit is particularly significant when applying for loans or negotiating payment terms with vendors. Regardless of whether you are a startup or an established company, the following steps can help you build robust business-credit.

Choose the Right Business Structure

The foundation of building business-credit starts with establishing your business as a separate entity. This separation helps build a credit profile independent of your personal credit. Consider these business structures:

• Sole Proprietorship
• LLC (Limited Liability Company)
• S-Corp or Corporation

A sole proprietorship does not create a separate credit profile and may expose you to personal risk. An LLC offers more separation, while an S-Corp or corporation provides further complexity and protection. Consult with a legal professional and accountant to determine the best structure for your business.

Register for a Federal Tax ID Number (EIN)

An EIN (Employer Identification Number) is a nine-digit number assigned by the IRS, akin to a social security number for businesses. You can apply for an EIN through the IRS website. This number is essential for:

• Filing taxes
• Applying for business credit cards
• Opening business bank accounts
• Obtaining permits and licenses

Having an EIN establishes your business’s legitimacy and creates a paper trail that contributes to building your credit.

Open Business Accounts

To build business-credit, start by opening accounts in your business’s name. This includes:

• A business checking account for operational expenses
• A line of credit
• A business-credit card
• A small business loan

Diversifying your credit types and using them responsibly demonstrates your ability to manage financial obligations effectively.

Keep Personal and Business Accounts Separate

Ensure that business expenses are paid through business accounts only. Avoid using personal accounts for business transactions. This separation simplifies expense tracking, tax deductions, and strengthens your business-credit profile.

Establish Credit with Reporting Vendors

Apply for net terms with vendors and suppliers who report to credit agencies like Dun & Bradstreet. Prompt payment on these accounts will be reported, contributing positively to your credit profile. Obtain a D-U-N-S number from Dun & Bradstreet to ensure your business is tracked and recognized.

Make On-Time Payments

Timely payments are crucial for building a strong business-credit score. Ensure that all bills and credit obligations are paid promptly to avoid negative impacts on your credit score. Consistently meeting financial commitments reflects positively on your credit report.

Monitor Your Business Credit

Regularly review your credit reports from all major bureaus to identify and correct any inaccuracies. Discrepancies can affect your credit score, so it’s important to address any errors promptly by contacting the relevant credit bureau.

Why is Business Credit Important?

Investing time in building business credit is crucial for several reasons:

• Securing business loans for growth
• Obtaining better rates and terms on borrowing products
• Receiving favorable trade terms from vendors
• Reducing the need to prepay for products and services

A strong business credit profile can save money on interest, preserve capital, and protect personal assets. Without good business credit, you might face higher borrowing costs or personal guarantees, increasing your risk.

Make business credit a priority in your financial planning. Ensure you borrow wisely, choose vendors who report to credit agencies, and continuously build and maintain a strong credit foundation for future success.