How To Build Business Credit (4 Proven Strategies)

Starting a business can be financially hectic which is why you need to know how to build business credit. Let’s say you start your own small business. You’ve put together your menu, hired your staff and found a great location. You even have seed money to pay for equipment and the first few months of rent, utilities and wages.

However, to effectively and successfully manage your restaurant’s finances, you need credit. Without it, you’ll have to use whatever cash you have on hand to pay for expenses as they arise — even before you’ve had a chance to make money selling your coffee, scones, and croissants. Even worse, your money may not be enough to support your growth, especially if the business is successful. Growing companies need time to produce positive cash flows. With credit, your suppliers and service providers trust that you can pay, which means you can run your business.

 This article will highlight the vital steps you need to take on how to build business credit, why it is important, and steps to finance and expand your business for maximum growth.

Key points to take note of:

  • Business credit is essential for almost all businesses of all sizes.
  • Business credit is not automatic; it needs to be built up over time – much like personal credit.
  • With credit, you can buy the products and services you need, even if you don’t have cash on hand.
  • The first steps include getting EIN and DUNS numbers, opening a business bank account, and signing up for business credit cards.

What is Business Credit?

Credit is the power to buy goods and services without cash to pay for them. Credit is granted when the creditor trusts that the buyer will pay the full agreed amount on time. For example, business credit may allow you to open a restaurant, which would probably be much more challenging if you were relying entirely on out-of-pocket money.

Note: Not matter how you want to put this; most businesses need credit to cover day-to-day operating costs, purchase inventory, and raise capital they need to expand and grow. It is almost inevitable to run a business without credit.

How Business Credit Works

Let’s say you own a millinery business and you need raw materials and other goods to make the products you sell. You can’t make money from the hats you’ll be selling until you’ve designed and made them. However, you will not have the money to pay for the design and production of hats until you have sold them. If you have business credit, you can pay later for the hats you make today; without it it can be difficult to get ahead.

Once your millinery business starts to thrive, your credit can help open the door to success. Your reputation with suppliers can help you buy more supplies, your business bank account can give you access to a line of credit, and your good credit can give you more access to loans.

What Affects Business Credit?

In most cases, your personal credit can affect your ability to build business credit because banks and credit card issuers look at both your business and personal credit histories. However, if you’ve paid off (or continue to pay off) loans for your own car, home, and education on time, you’ll have a head start when you start building business credit.

There, it is vital to keep a good personal credit records for the future whether you will be applying for a business credit or not.

Assuming your personal credit is in reasonably good shape, there are a few key steps you need to follow to build business credit:

  1. Establish your business with your own name, address and phone number
  2. Register your business with the IRS and Dun & Bradstreet
  3. Opening business accounts with credit card companies
  4. Set up credit terms with your regular suppliers
  5. Pay your bills on time or even sooner
  6. Keep a close eye on your company’s creditworthiness and scores

Key note: As you build credit, it’s important to avoid missteps that could have a negative impact. For example, a few late payments can make it harder to get the credit you need from key suppliers.

How To Build Business Credit

Below are the perfect steps to take to build business credit correctly.

1. Register your company

Until your business exists as its own entity, you cannot establish business credit. This is easy to do, even if you are a sole proprietor. Start by setting up a name, address, phone number, and email domain for your business. Register your business with the IRS to obtain an Employer Identification Number (EIN), as well as with credit reporting agency Dun & Bradstreet.

Register for an EIN number

An EIN is a nine-digit series of unique numbers assigned to your business and used by the IRS to identify your business for tax-related purposes. With an EIN you officially separate from your company because you are identified as an individual through your Citizen Service Number (BSN).

Note: Unless you are operating as a sole proprietor or sole proprietor with limited liability (LLC), an EIN is required if you want to open a business bank account, take out a business loan, or own a business credit card.

It is quite easy to get an EIN number; just go to the IRS website, choose the type of business you own, and fill out the paperwork.

Sign up for a Dun & Bradstreet number

Dun & Bradstreet is a credit reporting agency that provides information to lenders and other companies. To do this, the company uses a data universal numbering system (DUNS) number, a unique nine-digit identifier that it provides to companies.

Like an EIN number, the DUNS number is a way of identifying your company as an entity separate from you as an individual. More importantly, it is the number used by lenders and potential business partners to determine whether your business is reliable and financially stable. The US government also requires companies to have a DUNS number to apply for grants or do business directly with government agencies.

 Applying for a DUNS number online is free and quite easy to do.

2. Open business accounts

Once you have your address and EIN and/or DUNS number, you are ready to open business bank accounts. Whether you choose credit cards, bank accounts, or both, you’ll start building your credit right away.

Bank accounts

Business bank accounts offer a number of benefits that personal accounts do not. For example, they give you purchasing power, allow debit and credit card transactions, and may include a line of credit and protection against personal liability. But it’s important to note that banks don’t just offer business accounts to just anyone. You will need to apply for an account (usually online) and may need to provide:

  • Your EIN number (or BSN in the case of a sole proprietorship)
  • Company Formation Documents
  • Business license if needed
  • Any ownership agreements you have

Credit cards

It is possible to apply for a business credit card using only your business EIN number. In theory, this helps separate your business from your personal credit, and there are a few companies that offer EIN credit cards. However, the reality is that most credit card companies ask for your social security number and check your personal credit before issuing a card.

Key points: If you’re concerned about your personal credit history, consider improving your personal credit score before applying for a business credit card, such as paying bills on time, lowering the credit utilization rate, and paying off credit card balances immediately.

3. Pay your suppliers

Most businesses depend on vendors and suppliers, and you want to build positive relationships as quickly as possible. That means you always pay your suppliers on time. Depending on your business, some of the suppliers you work with are:

  • Companies that supply raw materials for your products
  • Business supply suppliers that keep paper in your copiers
  • Product suppliers who provide the products you sell in your store
  • Manufacturers who actually make the products you design

Once you’ve built a positive relationship, you can start thinking about getting credit from your suppliers. The better your relationship with your suppliers, the better their ratings will be and the stronger your credit rating will be.

4. Track your business budget and credit

As your business takes off, you will need to manage and track your expenses as well as your income. In addition, you must monitor and manage your creditworthiness. Both are important to maintain your creditworthiness and avoid potential problems.

To manage your business budget, you need to separate your business and personal finances. This is relatively easy if you have already set up business bank accounts and applied for business credit cards.

To manage your credit, you need to buy credit reports from companies such as Dun & Bradstreet and Experian. While these reports are not free, they are extremely helpful as they give you information about:

  • The accuracy of your credit reports
  • Any changes to your report that could affect your business
  • All possibilities to improve your creditworthiness
  • Possible Identity Theft
  • People and organizations asking for your credit

Read Also- How to Fund an Airbnb Business [4 Effective Tips]

How Company Structure Affects Credit

If your small business is an LLC, an S corporation, or a C corporation, it’s relatively easy to separate business from personal credit. However, as mentioned earlier, banks and credit reference agencies will most likely ask your social security number to check your personal credit before granting a business credit.

If you are a sole proprietor that does not have employees or certain types of assets, you have the option to use your Social Security Number as your credit identification code in any situation. If you do, your personal credit is the only way an agency can determine if you are creditworthy. Even if you are a sole proprietor, you must open a bank account in the name of your company to segregate your finances.

Frequently Asked Questions About Business Credit

Blow are some of the frequently asked questions regarding how to build business credit

What is the fastest way to build business credit?

To build business credit, start by establishing your business as a unique entity with its own name and address. Register your business with both the IRS to obtain an EIN and Dun & Bradstreet for a unique DUNS number. Then apply for business credit cards and bank accounts.

Can I build business credit if I have bad personal credit?

Yes, you can build business credit if you have bad personal credit, but it’s not easy. That’s because most banks and credit card companies usually ask for your citizen service number before offering credit. It is best to restore your personal credit before applying for a business credit. Another option is to apply for business credit cards that accept your company’s EIN and do not require an SSN.

How do I check my business credit score?

You can check your business credit score by purchasing reports from Dun & Bradstreet and credit reporting agencies such as Experian and Equifax. These reports are not free, but they provide very important financial information. Free credit reports are primarily available to consumers rather than businesses.

What is a good business credit score?

Each of the business credit bureaus uses a different scoring system. However, the Federal Reserve’s 2021 Small Business Credit Survey lists an 80-100 business credit score as “low credit risk.” However, you may see different numbers depending on the credit reference agency you contact.

Final Thoughts

Running a business isn’t an easy endeavour, especially, financially which is why getting business credits can assist with the business growth. The above steps on how to build business credits can help you achieve your dream of running a successful business since you will sort out all the expenses needed to run the business.

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