How to Build Business Credit for a Small Business

Last Updated on December 21, 2022 by Selina Parker

Building business credit is a process that can take time, but it is also an essential step for a small business. New companies must establish business credit scores to obtain funding and receive better terms from suppliers.

Getting your company set up and obtaining a business bank account, business credit cards, and vendor accounts are essential for establishing a business credit score, regardless of its legal structure.

This article is meant for a new business owner to overview the process and tips on establishing business credit.

WHAT IS BUSINESS CREDIT?

Building your business credit profile is as essential as establishing personal credit. You may use credit to its advantage, allowing you to qualify for loans and other forms of financing.

It’s also essential for establishing connections with suppliers and other B2B sellers. Business credit can be helpful bargaining or negotiating tool when you engage in price and service negotiations with other companies.

Your firm will have trouble borrowing money, applying for credit cards, forming relationships with vendors, and prospering as a small business if you don’t have business credit.

In the end, it’s a good indicator of your company’s financial health and success.

You also need to understand how lousy credit might harm your business when it comes to business credit. The most common impact is the ability to secure financing.

If you have poor credit, you won’t be able to get loans, charge cards, or other forms of financing. It can be devastating for a young company on the verge of expansion.

If you know your score and keep it high, you’ll be on the road to building a successful business.

HOW TO BUILD BUSINESS CREDIT

1. INCORPORATE YOUR BUSINESS

The first step to establishing business credit is to make your company a legal and separate business entity by incorporating or forming an LLC, LLP, or corporation.

The company is the same as the owner in a sole proprietorship and general partnership, so there can be no distinction between business credit history and personal credit history.

Create a legal name and establish a business phone number for your firm, which will lend it credibility with suppliers and the authorities.

2. REGISTER YOUR BUSINESS

Depending on the sort of company you set up as a legal entity, you’ve already completed this in Step 1. It’s vital, nevertheless, to double-check that you’ve completed all of the requirements imposed by the secretary of state to verify that your business is appropriately registered and formed.

3. OBTAIN YOUR EIN

An EIN (federal tax identification number) is a nine-digit number for your company that serves as a Social Security Number for a business. It’s necessary on federal tax forms and for establishing a company bank account in the name of the corporation or LLC.

Many large businesses require an EIN from their suppliers to pay them for products or services. You can utilize the IRS assistance tool to get a free federal tax ID.

4. OPEN YOUR BUSINESS BANK ACCOUNT

Establishing a company bank account is the first step in separating your business finances from your finances.

This type of account might also assist you in obtaining a business credit card and establishing a connection with a banking partner that may be useful in the future if you require a small company loan to expand your operations.

After you’ve opened the company’s banking account, be sure to make all of the company’s financial transactions from that account.

5. BUILD CREDIT WITH VENDORS

As your company grows, continue building and strengthening relationships with suppliers and creating contracts for products and other business resources. Applying for net terms with vendors and suppliers is one of the simplest methods to gain business credit.

You have to report your purchases and payments to the business credit agencies when you buy products, stock, or other material on credit.

This task helps develop your company’s credit profile and business credit report. You will have a credit score when your firm has many tradelines reporting.

6. USE YOUR BUSINESS CREDIT CARD

Another method to develop business credit is opening and using company credit cards. After opening a company credit card and setting up your bank account, make purchases on it each month when your firm is operational.

Research the best credit card that is most suitable for your business. Some credit cards may provide incentives that are beneficial to certain companies.

If you have just started your business, it is essential to keep in mind that your credit limit may be low, but it will increase as you build a good credit score.

7. ALWAYS PAY ON TIME

Building a good credit score starts with always paying your bills on time. It includes credit card payments, rent, utilities, and other business expenses.

You prove that you are a reliable and trustworthy business partner by having a good payment history. As your credit score improves, you will be able to borrow money at a lower interest rate for your company and receive better terms on contracts with suppliers.

8. KEEP MONITORING BUSINESS CREDIT REPORTS

Major business credit bureaus like Experian, Equifax, and TransUnion collect information yearly.

Because there are three leading business credit reporting agencies, it’s critical to keep an eye on each of your company credit reports and business credit file.

The good news is that each commercial credit agency has a procedure for you to update basic information about your company. If you find any outdated or incorrect information, you should contact the agency to correct it.

FINAL WORDS

An established business credit report allows you to borrow money when needed and sets your company as a credible business partner with better interest rates and loan terms. Building credit takes time and effort, but following these tips will help you get started on the right foot.