Establishing business credit is a critical step for any entrepreneur hoping to grow their business. Having strong business credit not only increases your company’s borrowing power, but it also helps separate your personal and business finances. This article provides a step-by-step plan to help you build business credit from scratch.
Understand the Basics of Business Credit
Before diving into the steps of building business credit, it’s important to understand what business credit is and why it matters. Business credit is a measure of a company’s creditworthiness, much like personal credit scores for individuals. It determines the likelihood that a company will repay its debts and plays a crucial role in securing loans, leases, and favorable terms with suppliers.
Establish Your Business as a Separate Legal Entity
One of the first steps in building business credit is to establish your business as a separate legal entity. This can be done by forming a corporation or a limited liability company (LLC). Doing so separates your personal finances from your business finances, which is essential for building business credit.
Obtain a Federal Employer Identification Number (EIN)
An EIN is like a Social Security number for your business and is required to open a business bank account, file taxes, and apply for business credit. You can obtain an EIN for free from the Internal Revenue Service (IRS) website.
Open a Business Bank Account
Once you’ve established your business entity and obtained an EIN, the next step is to open a business bank account. This account will be used for all your business transactions and will help create a clear distinction between your personal and business finances.
Register with Business Credit Bureaus
To start building your business credit profile, you need to register with business credit bureaus such as Dun & Bradstreet, Experian Business, and Equifax Business. Getting a D-U-N-S number from Dun & Bradstreet is a crucial step in this process, as many lenders and suppliers will use it to check your credit history.
Establish Trade Lines with Suppliers
Work with suppliers that report payment information to business credit bureaus. Establishing trade lines with these suppliers and paying them on time can help build your business credit. Consider starting with small vendors who are more likely to grant you credit and then gradually work your way up to larger suppliers.
Apply for a Business Credit Card
Applying for a business credit card is another effective way to build business credit. Use the card for business expenses and make sure to pay the balance in full each month. This will demonstrate your ability to manage credit responsibly and will positively impact your business credit score.
Monitor Your Business Credit Reports Regularly
Just like personal credit, it’s important to monitor your business credit regularly. Obtain copies of your business credit reports from major bureaus and review them for accuracy. Dispute any errors promptly to ensure your credit profile accurately reflects your business’s creditworthiness.
Maintain a Positive Payment History
One of the most important factors in building business credit is maintaining a positive payment history. Always pay your bills on time, including loans, leases, and supplier invoices. Late payments can significantly hurt your business credit score, making it harder to secure favorable financing in the future.
Limit the Use of Personal Guarantees
While personal guarantees may be necessary at the beginning, try to limit their use as your business credit strengthens. Reliance on personal guarantees can blur the lines between personal and business finances, and it’s essential to keep them separate for the sake of your personal financial health.
Be Patient and Persistent
Building business credit from scratch is not an overnight process. It requires patience, persistence, and diligent financial management. Stay focused on maintaining good financial practices and regularly engaging with your business credit profile to ensure it grows positively over time.
By following these steps, you can lay a strong foundation for your business’s creditworthiness, enabling you to access the financial resources needed for growth and success.
