Tax Center

8 Ways to Build Your Company's Credit

In his book The Tax & Legal Playbook, CPA and attorney Mark J. Kohler targets the leading tax and legal questions facing small-business owners, and delivers clear-cut truths, thought-provoking advice, and underutilized solutions to save you time, money, and heartache. In this edited excerpt, the author offers some easy-to-follow tips for establishing your business's credit.

As the new owner of a small business, one of the most important things you can do for your company is to start building your business’s credit. The following eight steps are straightforward and well-recognized, and they'll get you on your way to accessing credit lines for your business. Please know that you aren’t reinventing the wheel and there are no short cuts. If you follow the process described below, get support as needed, don’t give up, and are patient, you’ll obtain credit for your business.

Here are the eight steps that legitimate industry experts advocate:

1. Legitimize your business. You need to have a moneymaking business—something that's truly a business and not just a hobby or pastime. If you're going to work hard to build corporate credit, have a plan to use it. This is obviously a key to benefiting from tax strategies as well.

2. Form an entity. Form an S corp or a limited liability company (LLC) that can evolve into an S corp, and obtain an Employer Identification Number (EIN). You'll need a formal entity and will want to create a plan for longevity and success in building credit. If you already have an entity, better still. You don’t have to start with a fresh entity—unless, for some reason, you've tried to build corporate credit previously and your company has a poor payment history and bad credit.

3. Get a D&B Number. Often referred to as a DUNS Number, you'll need this number as it becomes the basis for your Paydex score. Similar to a personal FICO score, a Paydex score is the rating system for your business credit. To start this process, register your company and its EIN.

4. Consider using a business credit coach and educate yourself. There are honest and affordable services that can do the detailed work to educate you on the credit-building process. This work includes, among other things, the exhaustive follow-up and technical items that are a pain, like sending letters to credit-reporting agencies and creditors to remove items from your personal credit score. They can also provide resources and lists of companies and credit cards that are generally easier for your company to obtain. Finally, they'll help you learn all you can and make sure you avoid any pitfalls.

5. Open vendor and trade lines of credit. Apply for lines of credit at Home Depot, Staples, Verizon, Office Depot, or other vendors under the name of your company, then start using those cards and paying them on time. You may initially get rejected and need to co-sign personally for some of these credit lines, but that's fine in the early stages of the process. Relying on your credit coaching company during this process is crucial.

6. Apply for business credit cards. When the time is right, after building a credit history and credit score for the business via the previous steps, you can start applying for business Visa, MasterCard, and American Express cards.

7. Ensure that your creditors are reporting to D&B. Track your business’s credit score, and make sure your creditors are reporting to D&B on a regular basis.

8. Practice good habits. Always make timely payments, and don’t overuse your credit. Keep it in check, and don’t max out your cards.

As you build your business credit, creditors will look at the stability and earning potential of your business. Remember, your goal is to build a business and use the credit you're working so hard to get to impact your business in a positive way. Keep your eye on the ball, and present a separate and distinct business from yourself. Have a business website, phone number, answering service (if necessary), and separate checking account. Complete your tax returns on time, and focus on making legitimate income. Legitimate corporate credit will follow a legitimate business model.