Just as individuals need good consumer credit to take out loans, companies need to establish a solid business credit history to operate successfully. This article will discuss how it takes nearly two to three years to build good business credit and what you’ll need to do to get there.
If you’re just starting out in business, your creditworthiness will be based on your personal credit score and history. In general, it takes two to three years to build business credit before you’ll be considered for a business startup loan. That said, there are ways you can build business credit fast (or at least faster); for more information, read on.
You might wonder why entrepreneurs wouldn’t just use personal credit to take out a small business loan. In fact, many do: Of small businesses, 46% do use personal credit cards. But separating your personal and business finances is important if you want to protect your own assets and your credit.
Establishing business credit can protect your personal assets from legal liability. It can also allow you to take advantage of tax benefits, help track your business cash flow, and streamline your accounting. Business credit cards also typically have higher credit limits than personal cards, which gives you a greater source of funding as you invest in and expand your business.
Building business credit is a process: By going through these five steps, you can set your business entity up for success.
In setting up your business as a legal entity, it’s important to choose the structure that works for you: limited liability company (LLC), limited liability partnership (LLP), or corporation. (There’s no separation between individuals and sole proprietorships.) Then apply for an Employer Identification Number or EIN. This is a nine-digit number used by the IRS for tax purposes.
Once you have your EIN, you can use it to open a business bank account. This will be useful for keeping your business finances separate from your personal account. (You will also be able to use your EIN to apply for permits and licenses as well as to apply for credit.)
A D-U-N-S Number is another nine-digit business identifier generated by business credit scoring company Dun & Bradstreet. This will identify your company’s Dun & Bradstreet business credit file, which lenders can access when you apply for a loan or business line of credit. Your D&B file will also include basic information about your company such as its address and phone number, along with any branches or subsidiaries.
(Note: Equifax and Experian, which compile personal credit reports, are also business credit reporting agencies. The Fair Isaac Corporation, or FICO®, provides a Small Business Scoring Service in addition to compiling personal credit scores.)
Establishing a physical address enhances your company’s credibility with both customers and potential credit issuers. Adding contact information — such as a phone number, email address and website — allows them to learn more about you and get in touch with you if necessary. Your business website and email address should be separate from your personal contact information.
A business credit card can help you build credit and provide important protection against fraud, among other things. There are many types of business credit cards out there for different types of businesses. To apply for one, you’ll need to supply the following:
You may also need to provide:
Once you’ve established business credit, it’s important to build on it to enhance your business credit profile and secure lower interest rates. Here are some ways you can do that:
Whether you’re a new business or an established company trying to improve your credit, you may have questions about how to build credit. Here are some common questions and answers that can help.
Scales used for business credit scores differ from those employed for personal credit scores. Agencies use different formulas, with scores most often ranging from 0 to 100 (as with the Dun & Bradstreet Paydex score) and FICO’s going from 0 to 300. On Experian’s scale, a score of 76 to 100 indicates a business is a low-risk borrower.
In order to build credit, you’ll want to open accounts that report to the credit reporting agencies. It’s a good idea to set up a minimum of two or three accounts (or trade lines) with companies that send in reports. These can include business loans, supplier accounts and business credit cards.
Different credit scoring models emphasize different factors when compiling scores. Some things that are likely to be considered include your payment history, credit utilization, and how long you’ve had your accounts.
Experian considers factors like your outstanding balances and payment habits, as well as public records (including liens, bankruptcies and judgments) and Company background information from independent sources.
As mentioned earlier, the scoring system for business credit is different from that for personal credit, although some of the same factors are considered. In addition, information stays on your business credit report for varying lengths of time that aren’t the same as for a personal credit report. Payment trends over 12 months are among the factors considered.
Building business credit is an important priority for small business owners. Whether you need to buy office supplies, pay for inventory or shipping, rent space, or pay staff, you can improve your business credit in much the same way you build personal credit: by consistently making payments on time and keeping your debt low. If you do, your business will have a leg up on success as you head into the future.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
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