A Young Entrepreneur's Guide to Building Business Credit
The U.S. Small Business Administration reports that around half of small businesses fail during their first five years because of insufficient capital. One way to safeguard your business from this pitfall is by establishing a positive business-credit score, the number by which creditors and lenders measure your company's creditworthiness. If high, lenders, suppliers, investors, business partners and consumers see you as a trustworthy enterprise.
The steps for managing business credit include formally distinguishing your business entity, registering for identification numbers, opening business accounts and making payments using business checking and credit accounts. It also helps to maintain a good standing on your accounts, and take on more business loans and bigger credit lines once you've established months of responsible paying and spending habits.
You can protect your commercial investment by establishing a business-credit history immediately and taking action to continually increase your potential for building capital.
Here's your step-by-step guide:
1. Separate your business and personal expenses by defining your company as either a corporation or limited liability company. You will not be able to build business credit using only your personal account and personal-credit score. Instead, you must have a legal business entity.
2. You will need a federal Employer Identification Number, or EIN, which functions similar to a Social Security number, to open business accounts. Go online to the Internal Revenue Service to register for an EIN.
3. Register for a DUNS number with the Dun & Bradstreet Credibility Corporation. Not only will doing so ensure you get added to a database of millions of reputable businesses, but it will provide public access to your credit history.
4. Get current. As you complete registrations, make sure that your business name, physical address, telephone number and email are updated and accurate.
5. Open a business checking and business savings account, now that you have your EIN and DUNS number. Also, open a secured credit card, which is available to those without long credit histories and requires an initial deposit. These will be the accounts you can use for preliminary purchases, before you are eligible for more-favorable credit arrangements.
6. Set up automatic payments using business accounts from the start for expenses like utilities and business-phone lines. Use time to your advantage, recognizing that even smaller purchases reflect your spending habits.
7. Lease equipment for your business, rather than purchasing it to build your credit file before you are eligible for major loans or credit lines. The equipment itself will serve as collateral and the leasing company should alert business credit bureaus of payments as you make them.
8. Use credit to pay your regular suppliers. If you pay invoices early, your business-credit score will be positively impacted. Communicate with suppliers to ensure they are reporting your credit activity. Contact Dun & Bradstreet with payment history for smaller venders that do not report history.
Related: What's Your Financial Personality?
9. Maintain a low credit-utilization ratio to keep your business-credit score on track. Whenever you have open-credit accounts, make sure to pay attention to how much your balance is compared to how much credit you have available, as this makes up your credit-utilization ratio.
10. Keep your business-credit balance below the limit, as doing so will assist you if you suddenly need to make unplanned purchases. If you find your business is in a situation where you need to use more credit than usual, pay off your balance as soon as possible and speak to your credit-card company about raising your credit limit.
After six months to a year of consistently using and paying off business accounts, you may be approved for larger credit lines and major loans, which can provide the capital to expand your business and remain competitive in your industry.
How did you manage to build up your business's credit history? Share your strategy in the comments below.
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