How to Build Strong Business Credit for Your Business

Having a strong business credit profile is essential for improving the financial standing of your firm, as it plays a crucial role for entrepreneurs and business owners looking to launch or expand their companies.

Businesses can invest in personnel, equipment, growth prospects, and other things if they can access enough funding. Strong business credit makes it feasible for better lending conditions, lower insurance rates, and favorable supplier agreements.

However, acquiring a stellar business credit profile for funding prospects takes time, effort, and consistency.

Getting an employment identification number to build a foundation for company financing is the very first step in building your business credit. Next, steadily exhibit appropriate financial conduct, paying your bills on time, mainly to build your credit profile.

This post will walk you through the easy stages of building and growing your business credit systematically and sustainably.

How Business Credit Works

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The accounts and activities of a business are usually reported to a business credit bureau by suppliers, creditors, or vendors, who then create business credit reports. Your company credit scores are partly derived from the data generated by this activity.

A few scores consider data from the owner’s business repository, including the Small Business Financial Exchange and their personal credit file.

Better access to money and financial opportunities is one of the most evident advantages of credit creation for businesses. Entrepreneurs may be qualified for lines of credit, business loans, credit cards, and other funding sources once they build a strong credit history.

A company can increase its chances of obtaining capital at favorable terms and competitive interest rates by building a solid credit profile for financial opportunities.

How to Build Business Credit Fast

When establishing business credit, it can be beneficial to know where to begin. These are the steps you can take to make a business profile.

#1. Register the business and get an EIN

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On paper, your firm is lawful if registered with the appropriate authorities. The steps to register your firm will formally depend on your business structure and the state rules where you reside. In some states, you need not register if you are a sole proprietor and own a local business license. However, you will have to register your business if you set up an LLC or Limited liability company.

In addition, you may need to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The IRS utilizes this number to identify your business for taxation purposes. The IRS website has an application for an EIN.

#2. Open a bank account for your business

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While having a business bank account is beneficial for a few reasons, acquiring business credit is only sometimes necessary. Establishing a distinct bank account for your business gives it more credibility. Moreover, it facilitates the separation of company and personal spending, which can be helpful during tax season. 

To open a business bank account, you might be required to supply your EIN. When choosing a bank, looking into fees, additional account features, and minimum beginning deposit requirements is useful. 

#3. Get your DUNS number

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As was already indicated, you will require a DUNS number to create a business credit profile with Dun & Bradstreet. This number is available for free internet requests.

You don’t have to ask Equifax or Experian for a specific identifying number. Once businesses you borrow money from record your account activity, the credit bureaus can start constructing your business credit profile.

#4. Get a business credit card

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The purpose of business credit cards is to simplify the process of making the purchases necessary to maintain your company’s operations. No business income is required to be eligible for a business credit card; approval is usually granted based on your personal credit scores.

Keep the following things in mind when you compare business credit cards:

• Incentives
• Fees, such as the annual fee and fees for overseas transactions
• Rate of interest per year (APR) on purchases and balance transfers

Using your personal credit score to open a business credit card implies that you are individually liable for the debt, not the company.

#5. Establish Vendor Credit

Getting a small company loan might not be possible now if you are starting with your business credit. On the other hand, you can obtain credit lines via your suppliers or merchants.

Vendor credit, often known as trade credit, enables you to purchase goods from your suppliers now and pay for them later. Your account history can assist you in establishing business credit if your vendors submit information to Dun & Bradstreet or another credit agency. 

#6. Pay back the creditors on time

Your payment history is the most important factor that influences how you calculate your business credit score. Clearing your debts on time helps you build a strong business credit profile gradually. Remember, while paying on time is essential, making an early payment will improve your credit scores. 

#7. Establish trade lines with suppliers

Some suppliers offer trade credit which enables the businesses to make payment after a few days or weeks of receiving the inventory. This also positively impacts your business credit score if these payments get reported to the business credit bureau by your suppliers.

For instance, you can set up trade lines with local vendors, such as water distributors, to signify your accounts-payable relationship.

If your suppliers do not report you to the credit bureau already, you can easily establish trade lines with them and then enlist them onto your account as a trade reference. Once done, Dun & Bradstreet will automatically collect the necessary details without requiring your intervention. 

#8. Avoid liens and bankruptcy 

Having a negative judgment or liens and bankruptcy reports against your business drastically reduces your business credit score. Creditors get a legal right to seize your property if your business debt keeps piling up which consequently will force the court to pass a judgment against your business. 

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Hence, it is necessary to avoid judgments and liens; otherwise, such negative reports will degrade your business credit score for almost a decade. 

#9. Ensure the credit score information is up to date

Similar to personal credit, it is necessary that you closely follow your business credit report so that you can easily identify inaccurate information. You should regularly check your business credit scores with all three business credit bureaus, namely – Dun & Bradstreet, Experian, and Equifax. You should also check that all the trade lines are updated timely and, in case of any discrepancies, report the errors to the respective business credit bureau.

Personal Credit vs. Business Credit

Despite many parallels, personal and business credit are very distinct. The distinctions are broken down as follows:

Identification Numbers:

• An individual’s Social Security number is connected to their personal credit records.
• The IRS issues Employer Identification Numbers (EINs) connected to business credit profiles.

Factors Influencing Credit:

• Payment patterns, credit card and loan usage, and other individual credit-related actions all influence personal credit reports and ratings.
• Business credit history also contains information from public records, vendor credit histories, business sizes, and industry payment performance.

Credit Reporting Agencies:

• Equifax, Experian, and TransUnion are the three main personal credit reporting organizations.
• Businesses rely on business credit reporting services from Equifax and Experian to evaluate a company’s credit history. 

Credit Score Reporting:

• FICO or VantageScore are two sources of personal credit scores. Higher scores indicate better creditworthiness; scores range from 300 to 850.
• Equifax, Experian, and D&B produce business credit scores ranging from 0 to 100. The FICO Small Business Scoring Service assigns small business credit scores between 0 and 300 (SBSS). 

How to Manage Business Credit?

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These pointers can assist you in managing your business credit score while you establish business credit:

• Refrain from taking on more debt than you can pay off with your cash flow.
• Maintain a modest credit use rate on business credit cards.
• Pay all invoices on schedule, including debt repayment and payments to suppliers and vendors. 
• Keep a close eye on your company’s credit history to spot any alterations that could be detrimental to your credit rating.

It can take some time to establish business credit. Therefore, it’s critical to maintain consistency in your good financial practices. When trying to raise your credit score to get a business loan, remember that a lender may also consider other criteria. 

Wrapping Up

Establishing adequate business credit is highly beneficial for all businesses who wish to apply for a loan in the future, borrow money from vendors, or pay back the suppliers.

By following the step-by-step process listed in this guide, you can build a promising business credit score which improves the chances of your loan approval or receiving money from the vendors. Since building the business credit requires time, you should begin as early as possible.