Building credit for your business is a very important task that takes time and effort. No business will instantly have a credit profile. Creating a credit profile for your business is a process that will pay off in the end.
When building credit for your business you are creating a credit line that is separate from your personal credit. Many sources will say that business credit is a great way to conceal bad personal credit, but this is not necessarily true. In the beginning it is often important for the business owner to have good personal credit to start a business credit line.
Every business is different, and they also establish credit a little differently. There is no one exact way to establish a business credit profile, but there is a general process. This five step process conveniently outlines the important steps every business should take.
Step 1: Start as You Create Your Business
This step contains a lot of important actions. All these actions aim to successfully establish a company that looks legitimate on paper. This includes writing a solid business plan with financial information, obtaining all the required licenses, getting a business phone line that is registered and listed under the business’ name, and forming an LLC (Limited Liability Company). Forming an LLC is very important because it gives your company a corporate structure.
Another very important step when creating your business is getting a Federal Employer Identification Number (FEIN). This number comes for the IRS for your taxes. Having this number separates your business from your personal finances.
Step 2: Research Credit Bureaus and Lenders’ Requirements
There are three major credit bureaus that your company will want to get into. These bureaus are Experian, Dun & Bradstreet, and Equifax. You should research these bureaus and find out what they look for in a company. It is always good to know what you need in order to establish a credit profile with the credit bureau.
Step 3: Join Credit Bureaus
This step varies from business to business. Sometimes businesses can do this right away, and other times a business will need to work to meet the requirements of the credit bureau. Once the business meets the requirements it is a good idea to join all three credit bureaus.
For Dun & Bradstreet you will want to get a D-U-N-S number, but don’t stop there. Go on to create a complete profile with them. It is important to have a complete profile because it is a source for anyone who looks up your business. Sometimes businesses actually come looking for you, and the profile will be important when this happens.
Joining smaller credit bureaus that specialize in your industry can be very beneficial. Your business will be represented on a website where people go in search of companies like yours. It can be great exposure.
Step 4: Establishing Credit
There are three main ways in which a business can start on a credit profile.
1st Way: Obtain a bank account
Getting a business account that is separate from your personal bank account is a good idea in general. It may not be easy to do right away, but if you get an account you might be able to qualify for a credit card. However, this will probably depend on your personal credit.
Before choosing a bank to work with, make sure to research all your options. Sometimes a community bank or credit union will be the best option because they tend to be more flexible than other banks.
2nd Way: Finding investors and making first purchases
Having investors that have some sort of business credentials will really help your business out in the beginning. When you want to make your first purchases for your business make sure to work with vendors who will allow you to start a business credit line with them based on your personal credit.
Your business is more likely to be approved by the vendor if you have reputable investors. The vendors should also send your purchase and payments information to the credit bureaus to help you establish a credit profile.
3rd Way: Obtain a loan
Getting a loan from a state or national business association will also help establish business credit. Making the payments on time will help your credit profile, because the association will send that information to the credit bureaus.
Step 5: Applying for Credit
This step often occurs not too long after a business has started to establish some credit. It can be difficult for businesses to obtain credit when they are in their early stages, so it is important to go to the right place. The best idea is to apply to creditors who are known for helping out small business in the beginning without a personal guarantee. You may not always be able to find a creditor that doesn’t require a personal guarantee, but it is the ideal.
Step 6: Improving or Building an Established Credit Profile
After following the previous three steps your business should have a credit profile. It will probably be small, but there are simple ways to make it bigger or improve your credit rating.
- Getting an additional credit card. It is important to note that it is best if a business only has a few credit cards instead of many. Some people recommend having three credit cards with places that report your information to the credit bureaus.
- Continue to work with suppliers that send information to the credit bureaus.
- Make payments on time. The best idea is to make payments early, because it is often noted.
- Make sure your credit profile has different types of credit, including leases, loans, and trade credit.
- Keep your financial records and licenses current.
Step 7: Maintain Personal Credit
Your business credit will be very important, but your personal credit may be looked at from time to time. Make sure you don’t neglect your personal credit because you are concerned with your business credit.
Step 8: Keep an Eye on Your Profile
Once your credit profile is larger and available through a credit bureau it is important to check it a couple times a year. It is always good to make sure the bureau is displaying current information. If anything is wrong make sure to let the bureau know.
Step 9: Know Your Industry
It is very important for you to know what is going on in the industry. If you know what your competitors are spending you can get close to their numbers. This is important because vendors will be checking these numbers and will notice if your business’ spending is abnormal in any way. A good way to get informed is through forums. Joining the insider circles of the credit bureaus is also a good idea.