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3 easy steps to establish and build business credit

How SMBs can improve their credit scores and get the credit they need to grow their businesses

Small businesses really are the growth engine of the U.S. economy. The vast majority of U.S. businesses (almost 90 percent) are made up of companies with less than 20 employees. These small and medium size businesses account for almost 50 percent of all private GDP in the country.

That’s the good news for SMBs.

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Why it’s important for your business to build its own credit

why it's important to separate business expenses from personl

The bad news is that most SMBs struggle to thrive — especially early on. Cashflows are typically tight at the beginning of a company’s growth cycle. Banks and alternative lenders are reluctant to lend money to young, small businesses because they’re risky investments. Small businesses frequently lack real historical revenues to analyze and even if they did have a few years of revenues to show for themselves, those revenues can be pretty erratic as the company ramps up operations.

.To access much needed growth capital, a young company’s owner or founder needs to borrow money using his own personal credit. There’s just no other option. That intermingling of risk unfortunately makes it even more complicated to sort out how well a small business is doing and makes a hairball mess trying to disentangle the owner’s personal credit from that of her business. This cycle makes it harder to get access to credit in the future.

businesses should have their own credit cardsAccording to the Small Business Administration, 65% off all business owners use credit for business purchases. But what’s alarming, is that only 50% of those cards are actually in the business’ name. That’s huge personal liability and a huge headache.

So, at some point in your business, you have to take the hard step of building your business’ own credit. Like letting your children make their own mistakes so they can learn from them, your business needs to stand on its own two legs. The more credit your business has, the more likely it is to get a loan, favorable transaction terms from a supplier or a business credit card in the future. Hopefully, your business finances will quickly eclipse your personal finances and you need to set it free to do so.

What having business credit can do for you

what credit can do for your business

Hopefully, we’ve made the case to separate your personal finances from your business finances. That’s just the first step in structuring your business finances. To get a loan or a credit card in the U.S., lenders look at a personal credit report and score to determine the creditworthiness of a borrower. Individuals who want to improve their chances at getting good rates on loans steadily work to improve their credit scores.

The same things happens for businesses. Businesses have their own business credit scores and reports that banks and other lenders look at to determine whether or not to extend them a loan. Suppliers also pull these score to determine whether or not to establish tradelines, favorable short term credit like paying after 30 days, with a business.

Building business credit enables business owners more freedom and options to grow their businesses.

How to build and establish business credit

Step 1: Officially establish your business

officially establish your business to begin building credit

Incorporate: Incorporating your business is the first step in creating and improving your business credit. There are different types of options to set up a business entity (like an LLC, C-Corp, or S-Corp) that are beyond the scope of this article. By separating out your business activities from your personal dealings, you can take the first steps to having your business judged on its own merits. As a business entity, you won’t be personally on the line for any loans your business takes. Check with your accountant or business coach to determine which corporate structure is appropriate for your business.

You can use a local lawyer or CPA to help with setting up your company. There are also plenty of services that enable you to incorporate online, like and LegalZoom.

Get a tax ID: Once you’ve incorporated, the next obvious step is to apply for a tax ID. In the U.S., that’s known as a 9-digit Employer Identification Number (EIN). Like your personal social security number, you’ll need this number to identify your business whenever you’re filling out official forms.

apply for an employer identification number
here are a bunch of online services that can do this for you. You can also apply for an EIN directly via the IRS online.

Open a bank account: As part of establishing your business, it’s a good time to open a business bank account. Now’s a good time to stop intermingling your personal money from your business’. Start keeping your books using Quickbooks, Xero, or other software tools like them.

Step 2: Make sure the credit bureaus know you

open file with major credit bureaus

Similar to how things work with personal credit, credit reporting services play a role in business credit, too. In fact, two of the largest credit bureaus for individuals, Equifax and Experian, also provide credit scores for businesses. Dun and Bradstreet (D&B) is also a major player.

Search to see if you have a DUNS number: The credit bureaus all have services where your business can apply to get a credit score. These scores are then used by lenders as part of their decisioning process to extend credit to a business. Despite all its flaws, D&B’s DUNS number is still used to establish credibility with plenty of lenders. You can search to see if you have a DUNS number for your business.

Register for a new DUNS number: If your business doesn’t yet have a DUNS number, you can also register for a free DUNS number with D&B.

Step 3: Get suppliers to report their transactions with your firm

make sure your vendors report your credit history

Once you have a established credit by opening a file with the credit bureaus, it’s time to start building your business credit. The way this works in the business world is by getting suppliers to issue you short term credit and making sure the credit bureaus know about it. When a supplier sells a new business some stuff, they’ll generally ask for payment upfront before they ship their stuff.

As the two businesses get to know one another, those payment terms may be relaxed to 30 or 90 days. This is essentially a short term loan to the buyer, as she gets the goods before she has to pay for them. This is called a tradeline in the industry lingo.

Many suppliers report their tradelines with their customers periodically to the credit reporting services, like Dun and Bradstreet. On time payments impact your business credit score positively and the more tradelines your business has in good standing, the more your business is seen as creditworthy, as seen through your credit.

Establish payment terms with at least three suppliers: Work to establish at least three tradelines. D&B’s PAYDEX score, a risk score that judges how likely a business is to default on a payment, requires at least three tradelines. The PAYDEX score tracks how timely a business pays its bills. Because it’s dollar-weighted, larger bills paid on time will have a greater positive impact on the PAYDEX score than smaller ones. Also, PAYDEX is scored on a 1-100 range, where 80 means that a business pays everything on time. To get a score higher than 80, a business needs to pay its bills early.

Make sure suppliers are reporting your tradelines: While its generally accepted good practice for a supplier to report tradelines to D&B and other credit reporting services, they’re not required to. Check in on a friendly basis to your suppliers to see if they’re reporting your good behavior.

Sometimes suppliers report factually incorrect tradelines to D&B. If that’s the case, assume it was an honest mistake and check in with your supplier to see where the miscommunication occurred. If there’s a bigger problem afoot, consider switching your supplier relationship to a new vendor.

Monitor your business credit: Studies have found that up to 80 percent of credit reports have errors. It happens and the only one looking out for your business’ best interest is you. So, after you’ve established and built your business credit, continue to monitor your business credit yearly or on a monthly or quarterly basis if you’re thinking about applying for a loan in the next few months.

Tall buildings are built on strong foundations. Businesses require the same. The first major step in preparing a small business for success is by making it a business. That means going through the legal and financial steps to incorporate it and provide it with its own books and finances. This will set the stage to establish and build future business credit.

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