10 Steps to Establish and Build Credit for Your New Startup
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Not every new startup is going to attract millions of venture capital dollars -- in fact, it’s estimated that less than one percent raise capital from VCs. Unless you have personal savings that you are willing to dip into, that leaves bootstrapping, friends and family, crowd funding or traditional financing as your primary options.
According to Biz2Credit’s March 2016 analysis, big banks approved 23 percent of small business loans. Even if you don’t need to take on a small business loan in the early stages of your startup, it’s a good idea to make sure that you establish and build your business credit from the beginning -- you never know when you might need capital for growth, acquisition and expansion opportunities. Here are ten tips to help you establish and build your startup’s credit from the beginning.
1. Set up your business entity.
Consult with your accountant to determine how you should incorporate your startup -- LLC, S-corp, etc. Regardless of which route you choose, you will need to do this before you even think about building credit. You need a legal entity to use as a foundation to build on. You can incorporate yourself through state websites or use a third party, such as CorpNet, which is owned by fellow Entrepreneur.com contributor Nellie Akalp.
2. Secure an EIN.
Once you have your startup’s entity set up, you will need an EIN (employee identification number) from the IRS. If you use a third-party service to incorporate, you’ll have some assistance with this. If you are doing it on your own, go here to apply.
3. Get a dedicated business address and phone number.
If you don’t have a physical office location for your startup, consider renting a virtual office in order to secure a unique business address. For a phone number, opt for a VoIP service rather than a cell phone. My company uses RingCentral for our phone system, but it also has several options for single-line needs as well.
You will need a dedicated address and phone number to submit to business directories, such as YP.com and local.com. These are the directories the credit agencies and lenders source their data from, so it’s important that your startup have consistent contact information listed on all the popular directories. For a complete list of 50 online business directories, check out this resource from HubSpot.
4. Open a business bank account.
You don’t want to mix personal and business expenses, so open a business bank account as soon as possible. You can do this as soon as your EIN is issued. If you have a long-term relationship with your personal bank, consider opening your business account there. Sometimes, an existing relationship can lead to automatic pre-approvals for business credit cards and lines of credit.
5. Open a secured business credit card.
A brand new entity applying for a credit card will rarely result in an approval because there is no credit history for the business. If you have some extra funds lying around, open a secured credit card. Most banks offer these and you can get lines upwards of $25,000 -- the limit is equal to the deposit used to fund the card. Even if you can only spare $1,000, do it -- the monthly reporting to the credit bureaus will help establish a positive credit history for your business. You can check out Wells Fargo’s secured credit card product to get an idea of how they work.
6. Secure a DUNS number from Dun & Bradstreet.
Dun & Bradstreet is one of the main business credit bureaus, and its PAYDEX score is used by several lenders to determine the credit-worthiness of your business. You will need a DUNS number assigned to your business, and contrary to popular belief, you can obtain this for free. While D&B has several paid services and credit-building programs, you don’t have to pay in order to be issued a DUNS number.
7. Make sure Equifax and Experian know you exist.
Along with D&B, Equifax and Experian are the main business credit bureaus. While you can register and create a business credit file with D&B, Equifax and Experian will only populate a report based on information they have available. Making sure that your business name, address and phone number are listed on all the major directories, and opening a secured credit card that reports to the credit bureaus, will ensure that they maintain a credit file for your business.
8. Establish lines of credit with vendors.
Office Depot, Staples, FedEx, Home Depot and Lowes are just some of the big-box stores that offer lines of credit and report to the credit bureaus. These are relationships that might already be established, requiring you only to contact them and request a net-30 credit line. There are also several industry-specific suppliers that could potentially report to the credit bureaus, as well: You just need to contact them to find out. Also, look into a gas card -- most gas stations have corporate fuel cards that report. Ideally you want to have more than five of these accounts reporting to D&B, Equifax and Experian.
9. Avoid application sprees.
Don’t apply for several credit cards and loans for your business at the same time -- in the eyes of a lender this can look like you are attempting to secure multiple sums of capital at once, leading them to speculate that the business is in trouble. Apply for credit only when you absolutely need it.
10. Be diligent and always pay your bills early.
This one is common sense -- always try to pay your bills early, or at the very least, on time! A single late payment can destroy your business credit.