Establishing business credit is essential for the success of any company, regardless of its size or industry. Business credit allows a company to access financing, obtain favorable loan terms, and improve its overall financial stability. In this blog post, we will discuss some essential steps for building business credit.
Step 1: Incorporate Your Business
Incorporating your business is a critical first step in building business credit. By incorporating your business, you create a separate legal entity, which means your personal credit and finances will not be affected by your business’s credit standing. Additionally, incorporating your business can make it easier to obtain loans and other forms of financing. Some of the most common entity types are:
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Limited Liability Company (LLC)
- C-Corporation (C-Corp)
- S-Corporation (S-Corp)
Step 2: Obtain a Federal Employer Identification Number (EIN)
An EIN is a unique nine-digit number (XX-XXXXXXX) that the Internal Revenue Service (IRS) assigns to businesses for tax purposes. It is essential to obtain an EIN because it is used to identify your business for credit and tax purposes. You can easily apply for an EIN online through the IRS website.
The EIN is similar to a Social Security Number (XXX-XX-XXXX) which is also a nine-digit number.
Step 3: Open a Business Bank Account
Opening a separate bank account for your business is essential for building business credit. You should keep your personal and business finances separate. This means using separate bank accounts, credit cards, and financial statements. When opening a business bank account, choose a bank that offers services tailored to small businesses, such as low fees, online banking, and business credit cards. Make sure you don’t intermingle your personal accounts with business accounts.
Step 4: Establish Business Credit with Vendors and Suppliers
One of the most effective ways to build business credit is to establish a credit history with vendors and suppliers. Many vendors and suppliers are willing to extend credit to businesses, allowing them to purchase goods and services on credit and pay later. Make sure to pay all bills on time, as late payments can damage your credit score and make it harder to obtain credit in the future.
These vendors could be office supply companies (e.g., Office Depot, Staples), computer companies (e.g., Dell), cleaning supplies (e.g., Unline, Grainger), or anything else specialized to your business. These are typically known as Tier 1 creditors.
Step 5: Apply for a Business Credit Card
A business credit card can be a powerful tool for building business credit. You can use a business credit card to make purchases, pay bills, and track expenses. When applying for a business credit card, choose a card that reports to at least one of the major credit bureaus for business. These include Experian Business, Equifax Business, and Dun & Bradstreet. This way, your business’s credit history will be reported to the credit bureaus, which can help you build a strong credit profile.
If you are looking to build personal credit in case you need to give personal guarantees then I would recommend my online program called Personal Credit Creator.
Step 6: Obtain a Business Line of Credit or Loan
A business line of credit or loan can help you build business credit by establishing a credit history and improving your credit score. To obtain a business line of credit or loan, you will need to have a strong credit profile and demonstrate that your business is financially stable. Make sure to shop around for the best terms and rates, and only borrow what you need.
Step 7: Monitor Your Credit Report
It is essential to monitor your business credit report regularly to ensure that all information is accurate and up-to-date. You can obtain a free copy of your business credit report from the major credit bureaus, such as Experian, Equifax, and TransUnion. If you notice any errors or inaccuracies, you should dispute them immediately.
Building business credit takes time and effort, but it is essential for the success of any business. By following the steps outlined in this blog post, you can establish a strong credit profile and improve your chances of obtaining financing and other forms of credit. Remember to pay your bills on time, keep your personal and business finances separate, and monitor your credit report regularly. With patience and persistence, you can build a strong credit profile for your business and improve its overall financial stability.