Building business credit is essential for any small business aiming to grow and secure financing. Strong business credit can help you obtain loans, better terms with suppliers, and even reduce insurance premiums. If you’re just starting out or need to improve your business credit, here’s how to go about it.

1. Establish Your Business as a Separate Entity

Before you can build business credit, you must establish your business as a legal entity separate from your personal finances. To do this, take the following steps:

  • Incorporate your business: Form an LLC (Limited Liability Company) or a corporation to separate your business finances from your personal credit.
  • Obtain an EIN: An Employer Identification Number (EIN) is like a Social Security number for your business. You’ll need it when filing taxes and applying for credit.
  • Open a business bank account: Use this account solely for business transactions to keep personal and business finances separate.

2. Apply for a DUNS Number

A DUNS number, issued by Dun & Bradstreet, is crucial for establishing your business credit profile. Many lenders, suppliers, and creditors use the DUNS number to check your business credit report. Applying for one is free, and it’s the first step to starting your business credit history.

3. Start Using Business Credit Cards and Accounts

Once you have established your business entity, you can apply for business credit cards or lines of credit. Here’s how to get started:

  • Apply for a business credit card: Many banks and financial institutions offer credit cards specifically for businesses. Be sure to choose a card that offers low fees and rewards that suit your business needs.
  • Open trade lines with suppliers: Work with vendors who report your payments to business credit bureaus. Establishing trade credit will help build your credit history, especially if you pay on time.

4. Pay Your Bills on Time

One of the most critical aspects of building strong business credit is paying your bills on time. Late payments can significantly hurt your business credit score, just as with personal credit. Set up automatic payments or reminders to ensure you never miss a deadline.

5. Monitor Your Business Credit Reports

Regularly checking your business credit reports from major bureaus like Experian, Equifax, and Dun & Bradstreet is essential. These reports show your business credit history, outstanding debts, and payment records. Monitoring them allows you to:

  • Catch errors early: If there’s an incorrect entry or discrepancy, report it and have it corrected.
  • Track your progress: See how your credit score improves over time as you build your credit history.

6. Limit the Amount of Debt You Carry

While using credit is important for building your business credit profile, managing it wisely is equally essential. Aim to keep your credit utilization low by not maxing out your credit lines or running up large amounts of debt. A low credit utilization ratio (how much of your credit limit you’re using) helps maintain a healthy credit score.

7. Build Relationships with Lenders and Suppliers

Developing strong relationships with lenders and suppliers can be beneficial for building your business credit. Lenders are more likely to extend credit or offer favorable terms if they have a positive history with your business. Similarly, suppliers that trust you may offer better payment terms, which can positively impact your cash flow and credit standing.

8. Avoid Using Personal Guarantees

Whenever possible, avoid using personal guarantees to secure business credit. Using a personal guarantee can put your personal assets at risk if your business is unable to repay its debts. Instead, focus on building your business’s credit profile so that your company can qualify for loans and credit on its own merit.

Building business credit is a process that requires careful management of your financial activities, just like personal credit. By separating your personal and business finances, establishing credit lines, paying on time, and monitoring your business credit reports, you can create a solid credit profile. This, in turn, can open doors to better financing opportunities, improved cash flow, and stronger business relationships as your company grows.

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