Having good business credit means you’re more likely to qualify for financing, commercial lines of credit and better terms and rates on your loans. All those things are important, especially if your business relies on credit for day-to-day operations, inventory, new equipment or much-needed expansions. There are many ways in which businesses, even healthy, robust businesses, benefit from borrowing money.
As with personal credit, there are things you can do to improve your business’s credit or damage it. The best thing you can do to build credit – personal or business – is to borrow money and pay it back on time.
The way your business qualifies for credit can make building credit a bit of a Catch-22. It’s tough to borrow money if you don’t have good credit or have no credit history, which makes it harder to build good credit.
Thankfully, there are many things you can do to improve your business credit that don’t require you to qualify for business financing.
This may seem like an obvious statement, but you’ll need a registered business separate from your personal finances to effectively build business credit. This may be an issue for sole proprietors or contractors who don’t have an employer identification number (EIN).
If you’ve just been using your own Social Security Number and reporting your income on a Schedule C form, it may be time to incorporate your business as either a C-Corp or S-Corp or register as an LLC. For most new small businesses, the LLC (limited liability company) route makes the most sense, but each situation is different.
Being able to keep business and personal expenses separate is vital for building business credit.
You’ll need to apply for an EIN through the IRS. Since businesses don’t have Social Security Numbers, they use EINs to identify themselves on tax forms. You can apply for business credit with your Social Security Number if you’re a sole proprietor or LLC owner without employees, but as far as the lender is concerned there will be no delineation between you and your business credit, which may be problematic or limit your borrowing options.
Having a separate business address and phone number can also help draw a clear distinction between you and your business.
Opening a business checking account or any type of business banking account is a good second step after you’ve registered your business and gotten an EIN. You generally don’t need good credit to start a business bank account, you just need a business.
Making rent/mortgage payments and paying utilities does incrementally help your personal credit, and it essentially works the same way for business credit. Don’t pay business expenses out of your personal accounts – use your business bank account to pay business expenses. It will start building a credit history that will be associated with your business and not you personally.
There’s not a whole lot of difference between business credit agencies and personal credit agencies. The main differences are the agencies themselves. The most important credit score for most businesses will be their Dun & Bradstreet Paydex score. Many commercial lenders, vendors, suppliers and commercial landlords will reference a business’s Paydex score when determining risk.
You can take a proactive step by registering with Dun & Bradstreet’s Data Universal Number System (DUNS). Many loans don’t require a business to have a DUNS number, but some do – and registering is free, so why not do it?
Your regular supplier and vendor relationships may be one of the best credit-building tools available, especially if they report to credit bureaus. Businesses extend each other credit all the time in the form of payment schedules. If you operate on NET 30, NET 60 or NET 90 with a vendor, and you always pay on time or early, it can help build you credit over time.
Reputation and business relationships matter, so try to leverage them where you can.
If your business qualifies for a business credit card you should strongly consider getting one – as long as you can pay off your balances in full on time or early. Some businesses may also be able to qualify for a business line of credit, which is essentially money your lender puts in your business bank account that you’ll need to pay back.
Not every business owner will be able to qualify for a business credit card right out of the gate, especially if they have less-than-perfect personal credit, but if you can, it will be helpful.
One of the many services our team at H&H Accounting Services offers is help applying for financing. We have extensive experience preparing the various reports, statements, compilations and budgets that lenders often want to see before approving your business for financing.
If you need help qualifying for building, expansion or equipment loans, our team can assist. We’re also the Phoenix accountants to call for any tax preparation or bookkeeping needs you may have. Call us at (480) 561-5805 for a free one-hour consultation.
