5 Steps for Building Up Your Business Credit

A business needs credit just as much as an individual does. Good credit is needed to secure lending, qualify for larger credit lines, and enjoy better interest rates. For startup businesses especially, this access to lending is often an essential component of growth.

Even though you might have great personal credit, you won’t always be able to use it to grow your business. That’s why building your business credit is crucial. This guide will help you start building up your business credit today:

Establish Your Business

To establish business credit, you need to prove that your business exists. Open a business bank account and get a company phone number. Paying to list your address and phone number in business directories will put you on the map and verify future documentation.

The next step is to get your business incorporated. This verifies your startup as a legal business entity; it’s not just you doing contracted labor on the side. You’ll likely want to start as a limited liability company or LLC. In some cases, though, you might consider incorporating your business as a C corporation or an S corporation. By doing this, you become responsible only for the amount of money you personally invest in your company.

C corporations allow owners or shareholders to be taxed separately from the business itself. This option is typically reserved for companies that plan to trade publicly shortly. An S corporation is more appropriate for small business owners, with pass-through taxation for paying taxes at the individual income tax level.

Get Your Federal Tax Identification Number

This number is also known as an employer identification number (EIN); this number is your federal tax number required by the IRS. It acts as an identifier, as your Social Security number does for you, only for your business. Single-owner LLCs can often get away using the owner’s Social Security number until they get employees on their payroll.

To get an EIN, go to the IRS’s website and apply. It’s free to get one, and the process is quick and easy. This number will be needed whenever your business applies for a loan or a credit card. That means you’ll need to set this up before opening your first line of business credit. When applying online, you will receive your EIN immediately, but requesting one by mail will take up to four weeks.

Your EIN will never expire, so be sure to hang on to it. While similar to a Social Security number, as noted above, an EIN is not considered sensitive information and will be made public. Don’t let this scare you; your business will be entirely secure regardless.

Open Lines of Credit With Vendors

One of the strongest and most consistent relationships small businesses have is with vendors. Vendors that allow trade credit are extremely valuable, as your business can pay for materials received several days or even weeks after receiving them. Many vendors report payments to major credit bureaus, including any net-60 or net-90 transactions. If you’re in good standing with your vendors, it will reflect in the reports they send to the bureaus that rate your credit score.

In a sense, you create a line of credit when you do business with your regular suppliers. Making timely payments to them every month is similar to paying off any other business loan. The transactions pile up into positive payments that reflect well on your business credit.

Not all vendors report to business credit agencies, but that shouldn’t stop you from engaging in this practice. Having a good relationship with your favorite vendor can lead them in that direction. Be patient and continue to be a good partner, and eventually, they may start reporting for you. Working with multiple vendors also increases your chance of getting good reports to your name.

Apply for a Business Credit Card

One of the perks of owning a business is writing off expenses on your tax return. However, you can’t always write off transactions made on a personal credit card. Instead, you need a business credit card that will record all the purchases made to advance your business.

Research banks that issue credit cards to small businesses. You’ll want to compare their interest rates and annual fees as well as any incentives and rewards they might offer. Be aware that not all business card issuers report to the major credit bureaus, such as Experian and Equifax. Make sure to choose one that does so that your business credit is getting the boost where it needs it.

As with a personal credit card, be careful with how you use your business line of credit. A credit card is not an excuse to spend to your heart’s content or max out the card in the business name. A debit card will act as a useful payment method if you struggle with your spending in many cases. Be strategic with how you use your credit card and always pay your bill on time. How you manage your business credit card is just as important as owning one for regular use.

Keep an Eye on Your Credit

Credit reporting isn’t a perfect science. In fact, 25% of small business owners have discovered errors on their reports that negatively impacted their credit scores. To prevent yourself from becoming part of that statistic, keep a watchful eye on your account at all times.

No outside force or secret agent is plotting your company’s demise by ruining your credit score. Often it’s a simple reporting error that ends up on your record and leaves an unwanted blemish. Spotting these mistakes right away will put your business credit right back where it belongs.

Each time you receive an invoice or report, record it for safekeeping. Get monthly updates on your business credit and make sure your personal records match up exactly. If you spot a discrepancy, report it immediately so it can be resolved without further penalty.

Using these tips over time, your business credit will grow, and your financing options will increase. Your business will grow as you practice smart financial habits as part of your business mission.

John R. Wright
Social media ninja. Freelance web trailblazer. Extreme problem solver. Music fanatic. Spent several months marketing pubic lice in the financial sector. Spent 2002-2008 supervising the production of ice cream in Africa. Had some great experience developing robotic shrimp in the aftermarket. Spent several years getting my feet wet with puppets in Miami, FL. Was quite successful at supervising the production of corncob pipes worldwide. What gets me going now is working with electric trains in Mexico.