Anyone with a credit card can tell you that establishing credit is a key part of financial well-being. Good credit helps you qualify for more favorable interest rates on credit cards, car loans and mortgages — and it can even help you land your next job. Having good credit is important for financial success and stability in everyday life, regardless of how you’re planning to use it.
The same idea holds true for building business credit, although there are significant differences between establishing business credit and building credit as a consumer. Small businesses that build business credit fast can take advantage of the many benefits that come along with being recognized as a creditworthy company.
Why Is Establishing Business Credit Important?
One of the best reasons to build business credit is that it gives you access to much larger financial capacity than personal credit. If you want to invest more significant sums of money into your growing business, the amount available to you as a personal loan or personal credit limit might not be sufficient.
However, by tapping into the resources that are available for an incorporated business, you can dramatically increase the total amount of funds available to your company. If you own multiple businesses, you can even treat each one as a distinct entity when dealing with lenders. Ultimately, this affords you greater volume and flexibility when financing your various enterprises.
Separating Business and Personal Credit
Since business credit is handled separately from personal credit, the credit history of the business owner is never examined when lenders consider issuing a loan. Some business owners have negative factors on their personal credit score (student loans, mortgages or late personal credit card payments) that can drastically reduce the total sum of money they are eligible to borrow.
However, when a business owner applies for credit on behalf of their small business, lenders are only looking at the business’s credit history, not the owner’s personal credit. Any negative factors from the owner’s personal credit history would be irrelevant in the process of determining eligibility for a business loan.
When you apply for a loan using business credit, your personal credit is not negatively impacted by one or more credit inquiries. Using business credit actually helps protect your personal credit file.
Build Business Credit Fast: Checklist
Follow these steps if you want to build business credit fast:
Incorporate Your Business
In order to start building business credit, the owner must first incorporate the business by forming an LLC or other legal business entity. Incorporating your business legally separates your personal finances from your business.
Get Your EIN
Once incorporated, a business will receive its unique nine-digit Employer Identification Number (EIN) from the Internal Revenue Service. The EIN is used by government agencies, as well as any vendors and credit bureaus your business deals with.
Open a Business Bank Account.
Make sure you open a business bank account for your LLC, including a checking and savings account, in the name of your business so you can make payments and deposits.
Make Payments on Behalf of Your Business
Now that you’re an incorporated business, pay for all of your operating expenses — rent, supplies, utility bills, inventory, etc. — with your business bank account.
Making payments under the name of your business will help to build business credit history, as there will be a proven track record of your business making payments on time.
Get a Business Credit Card
As part of setting up your business bank account, you should also apply for a business credit card through your bank. Just like with a personal credit card, paying off the balance of your business credit card each month builds positive payment history, increases your business credit score and lets potential lenders know that your business is reliable and trustworthy when the time comes for you to seek additional investors or financing.
Apply for a DUNS Number
Dun & Bradstreet is a business credit reporting agency; you can help build business credit fast by applying for a DUNS (Data Universal Number System) number for your business. This will get your company connected to the business credit reporting system.
And having a DUNS number is also required if you want to apply for federal government contracts, grants or Small Business Association (SBA) loans.
Apply for a Business Line of Credit
If your business has just been launched, it might be prudent to “think small” in terms of building business credit. In the first 30 days after you’ve incorporated, try to arrange a small trade line of credit with a supplier or vendor. Consider applying for a small business line of credit from your bank. Even if you cannot qualify for a larger loan or credit limit, just getting a line of credit can help with establishing business credit.
Making Smart Business Financial Choices
Just like with personal credit, making small but sound financial steps for your business increases its credit-worthiness. Over time, as your business grows, your ability to borrow additional money will grow right along with it.
Once you’ve established good business credit, your company will be able to qualify for lower loan interest rates and get better payment terms from suppliers and vendors.
Building business credit can truly help you do more with your company: You’ll have more influence in the direction your company goes, and in the outcomes you can expect when making financial moves and strategic decisions.
Are you ready to start a business, form an LLC or reorganize your business structure to get serious about operating as a “real” legal business entity? Talk to Incfile today! Our incorporation experts can help you evaluate your options with state-specific advice.