How to Establish Business Credit

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We had Michelle Lambright Black, a well-known credit expert and founder of CreditWriter.com, contribute a guest post for us about establishing good business credit. Check it out and learn from the experts on Markaaz! 

Having a good credit rating is an important goal for both individuals and businesses alike. As a small business owner, having a good business credit score can work to your advantage in many ways. Whether you’re applying for business financing, seeking insurance coverage, negotiating terms with suppliers, or leasing equipment, your business credit reports and scores have the potential to set you up for success.   

If you want to build business credit, but you’re unsure where to begin, don’t worry. The business credit building process isn’t all that different from establishing good personal credit. Here’s a behind-the-scenes look at four smart steps that could help you build your business credit rating.   

1. Set your business up for success.   

Before you can establish business credit, you need to make sure your business is credible in the eyes of lenders and others. Achieving this goal does take a bit of legwork on the front end, but your efforts should pay off. The following checklist should help you get started.   

  • Choose your business structure. If you want to set your business up as a separate entity (and have the opportunity to build credit in your business’ name), opt for one of the following structures:   
  • Corporation (C-Corp or S-Corp)  
  • Limited Liability Company (LLC)  
  • Limited Liability Partnership (LLP)  

It’s worth noting that the legal structure you choose will impact your business taxes, personal liability, and much more. So, you may want to chat with your attorney and your CPA if you’re not sure which option is the best fit for your company.   

  • Get an Employer Identification Number (EIN). Applying for a federal tax ID is free and easy. You can submit your request on the IRS website and immediately receive your EIN. The IRS also allows you to request an EIN via phone, fax, and mail. However, these methods may delay the receipt of your federal tax ID for a month or more.   
  • Open a business bank account. It’s essential to keep your business and personal finances separate, and a business bank account can help you accomplish this goal. Make sure to open the new account in your business’ official legal name, so you don’t run into any verification issues when you apply for credit in the future.   

2. Apply for credit.   

Once you complete the initial steps above, you may be ready to start applying for credit in your company’s name. However, before you apply for business financing, you’ll want to make sure the lender will report the account to one or more business credit reporting agencies. Otherwise, the new account you open won’t help you establish a business credit profile.   

Here are some business financing options you might want to consider when you’re ready to apply for credit.   

  • Business Credit Cards. Many business credit card issuers will check your credit and require a personal guarantee when applying for a new account. So, if you have good personal credit, these accounts may be easier to open even if your company hasn’t established a credit profile of its own yet. Note that if you pay late or default on the account, however, you could damage both your personal and business credit scores as a result.  
  • Vendor Accounts. Another potential way to establish business credit involves applying for net terms (i.e., net 30, net 60, etc.) with several suppliers and vendors. Again, you’ll want to make sure those companies report to the business credit reporting agencies, or the accounts won’t help you build your company’s credit profile.   

3. Manage your accounts well.   

Opening accounts with creditors that report to the business credit reporting agencies can be helpful. But it’s critical that you manage your accounts well. Otherwise, the business credit accounts you establish might work against you.   

First, you always want to pay on time. Should you pay your accounts late, your business credit scores could suffer damage. Next, it’s essential not to overutilize your business credit card limits. If the balance-to-limit ratio on your business credit cards climbs too high, your business credit score might decline under specific scoring models.   

Just like bad credit scores can hinder your approval odds when you apply for personal financing, the same is true of business credit scores. Low credit scores signal that you (or your company) represent a higher risk to potential lenders. And if you do qualify for financing with a poor credit rating, lenders may offer you less attractive borrowing terms, such as higher interest rates and lower loan amounts.   

4. Monitor your business credit reports.   

It’s always a good idea to keep a close eye on your credit reports. This rule of thumb applies to business credit reports too. You should frequently review your credit reports from all three major business credit reporting agencies:  

  • Equifax  
  • Dun & Bradstreet  
  • Experian  

As you go over your reports, be on the lookout for any red flags. Suppose you discover issues such as accounts you don’t recognize or other incorrect details. In that case, you may need to contact the appropriate credit reporting agency and initiate a dispute to fix the problem.   

Monitoring your business credit scores may also be helpful. Tracking the movement of these numbers can help you understand the progress you’re making in your credit-building journey.   

It’s worth noting that you can have several business credit scores (just like you can have many personal credit scores). Equifax, Experian, FICO®, and Dun & Bradstreet all develop different business credit scores that lenders may purchase and use to evaluate risk.    

You can purchase copies of your business credit scores at varying price points directly from the score developers. Powered by Equifax, Markaaz also offers the opportunity to access your Business Credit Risk Score™ along with the scores of other businesses you wish to monitor.   

Bottom Line  

Establishing good business credit takes time. So, you’ll want to begin the journey as soon as possible. Yet despite the effort building business credit requires, your company’s benefits can enjoy once you succeed are undoubtedly worthwhile.   

Good business credit is the backbone of many successful companies. When you qualify for attractive credit terms, your business may gain access to funding options that help it manage cash flow, scale and grow, and take advantage of investment opportunities. A solid business credit rating can also save you money and serve as added security for the future.   

Michelle Lambright Black 

About the Author: Michelle Lambright Black is a credit expert with over 18 years of experience, a freelance writer, and a certified credit expert witness. During that time, she has written for numerous publications including FICO, Experian, Forbes, U.S. News & World Report, and Reader’s Digest, among others. She specializes in credit reporting, credit scoring, the intersection of credit and financing (business, mortgages, credit cards, loans), budgeting, and identity theft.  

Michelle is the founder of CreditWriter.com and HerCreditMatters.com—blogs aimed at helping people take charge of their credit and finances so they can lead happier, less stressful lives. She’s a firm believer that everyone deserves a second chance (or a 20th chance) when it comes to money management, and that any credit situation can be improved with the right plan and hard work.  

When she isn’t writing or speaking about credit and money, Michelle loves to travel with her family. She also enjoys taking Tae Kwon Do classes with her children. Michelle, her son, and her daughter all hold first-degree black belts.  

You can connect with Michelle online on Twitter and LinkedIn

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