A new small-business owner is likely thinking about ways to secure affordable financing, negotiate more favorable terms with vendors, or attract lower insurance rates. A strong business credit profile can help procure all three. But how do you establish business credit?
Though you may be familiar with how personal credit works, unless you’re a sole proprietor, your personal credit history won’t be tied to your business credit profile. There are specific steps to take to start building a business credit profile and boost your chances of securing a loan, a line of credit, or simply prove your business is a creditworthy enterprise.
Structure Your Business Properly
The first step to building business credit is to structure the company as a distinct legal entity, such as a limited liability company (LLC), a partnership, an S-corporation, or a C-corporation. Registering as any one of these business structures can allow the business to initiate its own credit rating that’s separate from the business owner’s personal credit file. This separation can help reduce the business owner’s personal risk in the case of any business debts, lawsuits, or other liabilities.
Businesses operating as a sole proprietorship, on the other hand, have no legal or financial separation between the business owner and the business. This means the company’s credit is tied to that of the owner, so any business financing or other liabilities could be reflected on the individual’s credit report.
When you choose the right type of structure for your needs, you can then file paperwork to properly register the business. Specifics depend on structure and location; a professional can walk you through these steps.
Open a Business Bank Account
Banks often need to see proof of registration as well as the business’ federal EIN before opening an account in the company’s name. Opening a business bank account is key to further delineating business and personal expenses. While a business bank account isn’t necessarily required to build business credit, it can make it easier to do so.
For example, a company may want to establish a business savings account to begin storing cash reserves. If the company is looking to open a business line of credit or take out a loan – both of which could help the organization build business credit, particularly with consistent on-time repayments – the bank may be more likely to extend financing if it sees the business has savings that can be used as collateral.
Ask Vendors to Report Payment History to Business Credit Bureaus
When it comes to actually building business credit, it’s not just loan and credit repayments that are important. Transactions can be as routine as paying the office’s cleaning services or water bill can also have an impact. These everyday interactions can offer valuable opportunities to build business credit. You can engage regular vendors, such as suppliers or service providers, in a conversation about reporting your payment history to business credit bureaus.
Punctual payments can help build positive business credit history. Business credit scores can take a hit if payments are late. You can set calendar reminders, use autopay, or leverage accounts payable automation to pay invoices on time or earlier. It can be smart to keep meticulous records on your end, as this can aid in resolving any potential discrepancies.
If vendors or creditors opt not to report to the bureaus, opening up the dialogue could still persuade them to serve as references or vouch for your record of timely payments. Positive relationships can help when opening a line of credit or forging connections with new vendors or lenders, especially if you're asked to provide trade references. These formal reports, provided by a business entity you’ve worked with or purchased from, can help prospective vendors or lenders assess a business’ creditworthiness.
Get a Dun & Bradstreet D-U-N-S Number
Dun & Bradstreet, a leading business data analytics organization that provides business credit reports, lets businesses obtain a unique nine-digit identification number, known as a D-U-N-S number. The number links the business’ credit and payment history to its Dun & Bradstreet credit profile. Companies and organizations around the globe can then look up the business’ D-U-N-S number to evaluate the company’s creditworthiness before lending it money, leasing equipment, or even granting government contracts. It’s free to apply for a D-U-N-S number.
Check In With Business Credit Bureaus
Dun & Bradstreet isn’t the only business credit bureau for small businesses to know about. There are also Experian and Equifax, two leading credit-reporting companies. Each evaluates multiple types of business credit scores to provide potential lenders with an accurate overview of a company’s creditworthiness and likelihood of making on-time repayments.
You can contact each of these bureaus to determine whether they have a business credit profile on file for your company. If they do, consider verifying the business address, contact information, and any other stored data are accurate.
Here is the relevant contact information for each bureau:
- Dun & Bradstreet allows businesses to review and update information.
- Experian allows small businesses to review their business credit report and verify information.
- Equifax business credit reporting data can be requested by contacting the Equifax team. Representatives can confirm whether the bureau is reporting tradelines associated with your business and help you find out if you can view your business credit report.
The Benefits of Good Business Credit
Establishing and building a business credit profile might take some legwork, but can be well worth the effort. A strong business credit history can enhance a business’ appeal to lenders and investors by indicating financial reliability, which can lead to better loan terms, increased borrowing capacity, and potential investment. It can also ensure sustained access to credit, which can be a crucial asset when navigating financial downturns. Meanwhile, proof of reliable payment history might encourage suppliers to offer favorable trade credit terms, or insurance agencies to offer lower premiums, potentially freeing up some cash for your other business expenses or ventures.
Establishing and nurturing a strong business credit profile can be integral to a small business' long-term success and financial resilience. You can take distinct steps, like structuring the business as a separate legal entity, obtaining an EIN, opening a business bank account, and ensuring that creditors and vendors are either reporting your payment history regularly or will act as a trade reference if needed.
A version of this article was originally published on July 06, 2016.