Business is all about starting capital, expansion plans, acquisition, further growth and new opportunities. A person is always on the look-out for money to meet his various demands. Besides personal savings, if you are willing to go for it, the other sources of acquiring finance are crowd-funding, family members and friends.
Times are changing and it has become important to build and establish a strong business credit so that you do not have to suffer any loss if any of the above sources refuse to come to your aid. Business credit score has a range of 0-100 with 75 and more as excellent.
It is dependent on your ability to pay bills timely, available credit in bank and credit cards and the number of inquiries on your credit profile. It is important for a company to build its business credit score to obtain finances, favorable rates and further extension of trade credit.
How to Build Business Credit?
1) Create a separate entity
Create a separate entity if you are looking for ways to build business credit. It is imperative that both personal and business credit remain separate so that one cannot impact the other in any negative way.
It means that you must incorporate and establish your business through proper channels. Create either a corporation or LLC as you cannot opt for either a regular partnership business or a sole proprietorship. This action enables the business to have a legal structure as well as credit rating separate from your own.
2) File the necessary documents
File the necessary documents after you have chosen the appropriate legal structure for your business. This will formalize and give it the necessary structure. The legal formation is compulsory to build credit hence follow all the required steps so that you can maintain the proper documentation as a proof for formal incorporation.
3) Obtain EIN
EIN is issued by the IRS and is equivalent to your Social Security Number. It is a good idea to obtain it as soon as possible because you will need it to open an account in the bank under your company’s name and also to secure contracts and establish trade credits with vendors.
Employer identification number or EIN is used by IRS to monitor and track all the business entities especially for payroll taxes and the incomes that the business has generated. Nowadays it has become possible to get an EIN in a few minutes online hence opt for it if you are looking for ways to build business credit.
4) Obtain DUNS number
DUNS or Data Universal Number System has been constructed and managed by a reporting agency for business credit called Dun & Bradstreet. It is globally acknowledged numerical identification system in relation to business entities. A nine-digit unique code is created for each and every business that is registered with the agency.
The best part of DUNS is that it is not managed by any government agency nor is limited to a particular country. It is not compulsory to obtain a DUNS number although people acknowledge its worth to build business credit. Register early on because it will fruitful later on when you will actually need it to establish credit, apply for SBA loan, extend trade credit and compete successfully for government contracts and its several grants.
The process of obtaining DUNS number is possible via online registering via Dun and Bradstreet’s Company Update portal. You just need to offer required basic information and in a few minutes, you will be successful in your efforts. Remember it is free and you do not have to shell any extra amount for the registration. You will receive the DUNS number via email or mail in nearly a month’s time.
5) Get registered on Experian and Equifax
Besides D & B, there are two other important credit bureaus related to business. Hence register with Experian and Equifax also besides D & B to create a credit file in relation to business credit. List your business name, phone number and address on major directories and open accounts that report directly to credit bureaus if you are looking for ways to build business credit.
This will prove beneficial for you in the long run when you will be needing the credit report to obtain loans or credits for your business.
6) Open business checking account
It is necessary to start as you mean to go on. Hence keep finances related to both personal and business entity fully separate if you are looking for ways to build business credit. An important step towards this thought is opening and maintaining separate accounts in the bank as well as credit cards.
Remember to separate all your transactions so that it becomes easy to maintain records. You can open a business account in either the bank that has your personal account or a separate bank as per your convenience. Make sure to use your specific EIN in the business account at the onset so that all details of financial history are logged accurately.
7) Set up a business address
Establishing a business address is very important if you are on the look-out to build business credit for your company. This step solidifies the existence of your business entity and enables you to register it in business directories. Remember it is also considered an important part of the verification process and several credit agencies consider it a must while verifying your existence and credibility.
8) Set up a phone line
You can choose a cell phone, landline, Google Voice number or VoIP services to set a particular phone line for your company. It is imperative that the number gets listed in public directories if you are looking for ways to build business credit.
Use it on a regular basis if you are working with creditors and traders so that the number gets associated with your business entity. Remember some credit agencies looks at the listed numbers for verifying your credibility.
9) Establish trade lines
Establish a solid relationship with your suppliers and vendors if you are interested to build business credit. A good foundation will prove fruitful in the later stages and will become a blessing in establishing credit. Try for trade credit from vendors and suppliers so that you can have leeway and pay after you receive the items.
Try to negotiate for the best terms for you. If you pay the due amount in full and on and before the time this boosts your credit scores. Opt for people who will report it to Business Credit Bureau as this will prove beneficial for you.
10) Get a business credit card
Credit lines and loans are very popular methods of acquiring finance for small business entities. It helps in its growth and seamless operation. Several business credit products are available for small business but the entity must be at least two years old to qualify for the line of credit. You can opt for a business credit card for your daily activities related to business.
It will allow you to borrow money but make sure to pay back in the account before the due time as it will replenish the credit limit to the original amount. Opt for a card that reports all the activities as it will help you to build business credit.
11) Apply for small business loans
Apply for small business loans from your bank if you are looking for ways to build business credit. Tying up the loan with a bank account will nudge the bank towards saying yes to your request and it will help you in earning brownie points when you show that you are repaying a business loan from a bank.
12) Borrow from lenders that report all the activities
If you are one of those people who believe in prompt payment then you must find lenders that report your good payment history to credit bureaus. If a lender does not make the effort to report all the financial activities then you will not be able to establish a good credit score. Opt for them if you are unable to make payments on time. Remember most of the financial institutions report the repayment history diligently hence you must be aware of them if you are looking for ways to build business credit.
13) Make sure all the information is current
See that all the information listed in your credit report is current as it has a direct impact on your credit score. All the three main credit bureaus are independent of each other and collect different information. The vendors and suppliers also report to different bureaus. Make sure that all the information is listed in all the three main credit reports.
14) Scan for errors
Agencies related to business credit have to gather facts and information from various sources and sometimes an error occurs. It is imperative that you identify and correct them within a reasonable time frame if you are looking for ways to build business credit. Several owners of small business entities have found significant errors hence be diligent in your efforts and keep monitoring the reports regularly.
15) Pay your bills on time
Late payments have a negative impact on the business credit hence avoid it at all costs. Credit bureaus love business entities that pay on time as it boosts the credit scores. If you are looking for ways to build business credit either pay early or on time and make sure all the transactions are recorded in your credit history. Remember even if you are late by a few days it will have a negative impact on your business credit hence try to be on time.
Importance of Business Credit
Business credit is a determining factor for the financial reputation of an organization. It has a major impact on the funding and tells whether your company can be trusted in financial circles to manage money properly.
Business credit is all about trust, reputation and future relationship in a professional capacity. Building business credit is a slow and steady process that is very important in acquiring financial backing as it eventually leads to the growth of the company.
In simple terms, it is an economic resource that establishes the financial foundation of your business entity. One of the most important advantages of having a good business credit is that you can be on the driving seat during negotiations with suppliers, investors and potential lenders.
1) Separate professional and personal life
Personal life should be a different entity from your professional existence. A business is a risk with ups and downs and you cannot let it have a direct impact on your personal commitments.
Your personal credit may be very high but it is not a good idea to take loans in your personal name as it makes you directly liable for the debt. If you hit any hard times it will have an adverse effect on both professional and personal life.
One of the best ways to build business credit is to safeguard your individual responsibilities and separate business activities completely. It is important that your company gets credit on its own worth so do not mingle funds.
2) Creates viable safety fence
Business is very unpredictable and both profit and loss are part of its nature. One important reason to build business credit is to create a viable safety fence around it. A time might come when your sales figures drop or you have been unable to make as many transactions as required.
These grim circumstances might result in a money problem and you might need extra cash to handle the lean period. A good business credit will acquire the much-needed cash from a lender and help you in getting over the problem.
3) Financial prospects
One of the main reasons to build business credit is that it will enhance the financial prospects of a company. Guidelines for corporate compliance are very explicit and creditors and lenders are interested in handing over any assistance only to those who are in tandem with the business credit ratings.
A good history of business credit will prompt lenders to offer loans at low interest as they find you trustworthy. It is easy to acquire a short-term loan but if you are planning for a long-term one then it is necessary to make regular payments and meet your responsibilities on the dot as this will help you in increasing your creditability.
4) Building future credit
One way to build business credit is by taking out short-term loans and safekeeping your cash. Make sure to pay on the time and meet all requirements successfully.
Once you have established your credibility your firm will be easily eligible for long-term loans from any establishment in the future. This is a very innovative tactic and will help in building a strong and trustworthy relationship with a specific lender.
Make sure to take on as much as you are capable of because even a single late payment will drastically affect your credibility in the market.
5) Expansion of physical location
If you are having a good run in your business it might lead to the idea of expanding your physical location. Your office might start looking a bit crowded as you have acquired a larger sales force or your retail outlet might be having more customers than usual.
This is the right time to think about expansion plans for your outgrown space. But do you have the necessary cash or are you looking for a business loan? Will it be short-term or long-term are some viable questions that you need to address beforehand.
One of the major reasons to build business credit is that at this particular time you can overcome all these problems. As your credit is high you can acquire a loan easily for both short-term and long-term period.
6) Conserving cash flow
It is a good plan to conserve your cash flow for emergencies and dire situations. In order to build business credit, you must have a supply of ready cash at hand. Vendors and suppliers extend their credit policy without difficulty for one to three months.
Negotiate the terms to your advantage and try to get a grace period. This will help you in meeting all demands successfully within the time frame and you will be able to keep your cash back into your business.
The payment for the services and all the products that are part of your business can be deferred for a later date and you can use this cash for other purposes successfully.
7) Save money
A business can obtain more favorable interest rates than individuals. Lines of credit for both of them are different for instance a business is viable for nearly 7% interest in several circumstances whereas an individual for the same category might have to pay more than 10% rate.
This huge difference is why you need to build a business credit as it will make your firm eligible for credit lines. Lower rates will help you in saving money to a greater degree and you can utilize this saved money for other business transaction easily.
8) Purchase inventory
Inventory is an integral part of an organization and is considered by some as of the biggest and major expenses. It is important to meet the daily demands of your business and replenish your inventory at periodic intervals.
Sometimes it is not possible for a business house to make that investment or he may not have enough cash to do so. You need to build business credit because this is the time when your good business credit might prove useful and you will be able to make a purchase on credit with a payment option of a later date.
9) Business opportunities
Business is about finding the right opportunities and meeting them on time to gain the first advantage. One reason you need to build business credit is that you can easily convert these opportunities into your benefit. Sometimes chance can lead to a better transaction.
For instance, a company is suddenly offering a huge discount on bulk purchases or you may be getting the option of paying a minimum rate of interest on a loan if you pay it together for six months.
It will be beneficial if you can do so but where is the cash to meet them. In this case, you can take out a short-term loan and help your business by meeting such prospects. Make sure that that the probable investment return is considerably more than the debt you will be acquiring.
Weigh all the pros and cons, make your decision on hard facts and then if found favor, grab the chance to expand your business.
10) Building a business asset
One reason to build business credit is to build your business asset. Yes, it is true. A potential buyer will first look at the business credit and then will agree to your demands. A business entity that has established itself in the market will be eligible for better credit lines.
It will enhance its credit history in the eyes of potential investors, buyers and lenders. The chance of acquiring financial assistance increases to a greater margin and your business seems a safe bet to others. The company value increases.
By this time you must have realized how important business credit is for a company and various methods to build it. You never know when the necessity for further capital may strike and remember at such times it is business credit that is a blessing in disguise for an entrepreneur. It is crucial maintaining a strong credit to sustain seamless operations. A company becomes better positioned in terms of payments and can ask for favorable credit terms from lenders and banks. Remember to build separate business and personal credit as you can minimize any negative effect of one on another.