It is no surprise that having good business credit is essential when growing your business. When you have a good business credit score you can secure better terms with lenders and suppliers. If you are looking to apply for a business loan, you will get low rates, good terms, and a large amount of capital. There are so many benefits to having a good credit score and today we are going to discuss the steps to take to build your credit now.
What is Business Credit?
Business credit is based on the financial history of your business including credit cards, lines of credit, and more. Businesses have credit reports and credit scores like people do. There are credit bureaus for businesses that have a record of all credit information on businesses which are Experian, Equifax, and Dun & Bradstreet.
When you apply for a business loan, lenders will look at your business credit report to see where you stand and use it in their decision-making process of whether to approve you or not. Ultimately, business credit determines how creditworthy you are and if lenders can trust you with their loan.
How to Build Business Credit
Register Your Business Entity
By incorporating your business, it will help establish it as a legal entity which can help your business credit file running. To establish business credit, you will need to choose one of the following legal structures.
- C-corporation – A C-corporation gives you and your business legal and financial separation. Corporations are considered separate legal cities, and a C-corporation is ideal for a business that is planning to issue stock or go public in the future.
- S-corporation – S-corps are pass-through entities in which business’s profits are only taxed at the individual level. S-corps are also considered separate legal entities.
- Limited liability company (LLC) – An LLC is another type of incorporated business entity with liability protection. It is the fastest and most affordable option out of all the structures.
- Limited liability partnership (LLP) – An LLP is a registered business entity that is popular among professional industries, such as lawyers and doctors.
Before deciding which legal structure to use, do your research and consider speaking with a lawyer to choose the right one for you.
Obtain an Employer Identification Number
An Employer Identification Number, or EIN, is like a Social Security number for your business. It is not required but it is a good idea to get one, especially to help you build business credit. You can set it up through IRS online and the process is simple and free. An EIN is needed for when you need to open a bank account under the name of your business or when you apply for a business credit card. Be sure to put your EIN on any credit application for your business so that payments will be reported on your business credit report.
Open a Business Bank Account
It is essential that you separate your personal finances from your business finances. By opening a business bank account, the business credit bureaus will see the money you are using for your business and add that information to your business credit report. Once you have chosen the business checking account that is best for your company, start to use it by paying for any business expenses. It is important to pay these on time because this will help build your business credit.
Establish a Good Relationship with Vendors and Suppliers
When you have a good relationship with vendors and suppliers, you can avoid paying up front for items or services. You can establish good business credit by securing a line of credit or payment terms. Whether you are purchasing equipment or services, you will want to open multiple lines of credit. However, these will not show up on your business credit report. You will need to request that they report your payments.
Monitor Your Credit
Credit reports are not perfect, and they can have errors on them. It is important for you to monitor your business credit history and report any issues that are not accurate. You can check your business credit report through Equifax, Experian, and Dun & Bradstreet.
Why a Good Business Credit is Important
A good business credit score will allow you to secure better terms and better interest rates on loans. When your business credit is bad, it can limit your chances of securing financing because it is one of the primary reasons business owners are denied. To avoid this from happening to you, make sure you regularly monitor your business credit report and make timely payments.
The Bottom Line
As you can see there are a few steps to take to build your business credit. Although it takes some time, it is worth it in the long run. When you have a good credit score, it can mean immediate approval for financing. By understanding what business credit it and the importance of keeping a good credit you will set your business up for success.