How to Build Business Credit: Building Credit for Your Small Business

How to Build Business Credit: Building Credit for Your Small Business

Before we delve deep into building your business credit, let’s understand what business credit is and why you need it?

A business credit card is intended for business use, just like a personal credit card is used for an individual’s personal use. Business cards are available for small to large, all businesses sizes. A business credit score reflects your business’s financial health that companies, investors, or economic organizations see to determine if your business is good or not to lend money or do business with.

Different agencies have different methods of calculating business credit. But a business score typically ranks from 0 – 100, and the higher your score, the lesser is your calculated risk.

Why Is Business Credit Important?

As a small business owner, having a solid business credit score can help you grow your company.  Investors rely on your creditworthiness from setting loan terms to determining insurance premiums or considering viable partner banks.

Just like your personal credit card is linked to your social security number, your business credit is linked to your business entity and Tax ID number.  It is essential to keep business and personal credit cars separate. Your business decisions should always be separated from your personal credit history.

Establishing Your Business Credit:

Step-1: Choose the proper business structure:

Like earlier explained, your business credit history should be separate from your personal credit history. Hence, the first step is to keep your business and personal finances separate. And for that, you have to set up your registered business entity.

It is easiest to work with unincorporated business entities or a sole proprietorship in terms of managing paperwork, but in these structures, there is no distinction between the owner and the business.

There are various structures like C- corporation, S-corporation, Limited Liability Company (LLC), a Limited Liability Partnership (LLP) that you can consider before establishing your business credit. If you’re unsure about which structure to choose from, then you can seek help from a business attorney or an accountant.

Step-2: Get an Employer Identification Number

Getting an EIN is a next step to establishing your business credit. An Employer Identification Number is used to track businesses for tax purposes.

Usually, sole proprietorships and single-owner LLCs can use the owners’ social security numbers for tax purposes, but most businesses need an EIN.

Getting an EIN is not only free but super easy to apply for on IRS’s website. It will help you establish your business credit.

Step-3: Open a Business Bank Account

This step is mandatory to create a separation between personal and financial expenses. Doing this will enable business credit bureaus to see what money you’re making and taking out of your business and help make your business credit report.

Once you open your account, it is equally important to use it. This account should be used for business purposes only from utilities to rent or business cell phones. As long as you consistently pay them on time, it will help you build business credit.

Step-4: Set up a business address and a phone number

This next step might seem simple, but the importance of having a separate business address and phone number will help build business credit as it will allow you to register with business directories. Even if you are operating virtually, you can have a virtual business address.

Additionally, setting up a phone line and business address establishes your first trade credit relationship with your phone or virtual business address company. This history gets reported with credit card agencies which will help you establish your business credit.

Step-5: Apply for a Business DUNS Number

A Data Universal Number System (DUNS) is a numerical identification process for business entities. After applying for this system, you will get a unique 9-digit number. The process is entirely free, and you’ll get a DUNS number in 30 days.

While having a UNS number isn’t a business requirement unless you’re applying for a government loan or contract or SBA loan. Since DUNS business scores are used by national to international suppliers and lenders. So, if you’re trying to build your business score for your startup, it’s an excellent idea to apply for it.

Step-6: Get a business card or line of credit

Business credit cards or lines of credit are a great way to establish business credit. They are available to companies and sole proprietors of all sizes.

A business credit card might also provide you with additional perks like rewards, cash flow help, and simplified accounting.

When it comes to business cards, it is absolutely crucial to building solid relationships with your vendors and suppliers because they are the ones who ultimately report payments to the business credit bureaus.

Also, ensure that you pay your business bills like utilities and rent on time to protect your score.

Step-7: Borrow Responsibly

Just like building your personal credit, it is imperative to keep borrowing habits in check to make a credit score. Your business score will significantly improve if you’re drawing and paying those accounts fully and on time.

Another factor you need to keep in mind is the credit utilization ratio. Your credit utilization is based on how much you have to how much you’re using. For example, if you have a $5000 balance on $10,000 available credit, your credit utilization ratio is 50%.

The higher this ratio, the more you’re at risk, so generally, you should aim to keep this ratio below 30%.

Lastly, as borrowing and lending get more competitive, your creditworthiness is your biggest asset so start building today!

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