Published By Janet Gershen-Siegel at June 8th, 2018
Do you know how to build business credit? We break down just what you need to know and show you what will work.
To build business credit means that your small business gets opportunities you never considered you would. You can get brand new equipment, bid on realty, and deal with the company payroll, even when times are a bit lean.
This is especially helpful in seasonal companies, where you can go for several months with solely minimal sales.
As a result of this, you really should focus on building business credit. Improve and maintain your scores and you will have these opportunities. Do not, and either you do not get these opportunities, or they will set you back you a lot more.
And no entrepreneur wants that. You must understand what affects your business credit before you can make it better.
This is how long your company has been making use of company credit. Of course newer businesses will have brief credit histories. Although there is not so much you can specifically do about that, do not fret.
Credit reporting agencies will also consider your personal credit score and your personal background of payments.
If your personal credit is excellent, and you have a reasonably long credit history, then your individual credit can come to the rescue of your business.
Of course the opposite is also right. If your individual credit history is poor, then it will impact your corporate credit scores. That is, until your company and individual credit can be separated.
Your credit utilization rate just signifies the amount of money you have on credit. It is then divided by your total available credit. Lenders generally do not wish to see this exceed 30%. So for each $100 in credit, do not borrow on more than $30 of that.
If this percentage is increasing, you’ll have to spend down and repay your financial debts before borrowing more.
Late repayments will influence your small business credit score for a good seven years.
If you pay your business financial obligations off, then you can make a very real difference when it concerns your credit scores.
Make sure to pay punctually and you will benefit.
A bad business year could end up on your consumer credit score. And if your company has not around for too long, it will directly affect your ability to build business credit. Nonetheless, you can unlink both by taking steps to separate them.
Say, if you get credit cards only for your business, or you open business bank accounts, then credit reporting agencies will begin to treat your individual and company credit separately.
Like every organization, credit reporting bureaus such as Equifax and Experian are only as good as their data. If your business’s name is like another’s, or your name is a lot like another business owner’s, there can potentially be some mistakes.
So keep track of those reports, and your business report at Dun & Bradstreet, PAYDEX.
And while you’re at, keep track of the credit reporting bureau which only handles consumer credit, TransUnion. If you do not know how you can pull a credit report, do not worry. It’s easy.
Small business credit is credit in a business’s name. It doesn’t attach to an entrepreneur’s consumer credit, not even if the owner is a sole proprietor and the solitary employee of the company. Thus, a business owner’s business and consumer credit scores can be very different.
Business credit is an asset which can help your corporation in years to come.
Because company credit is distinct from consumer, it helps to protect a small business owner’s personal assets, in the event of legal action or business insolvency. Also, with two separate credit scores, a small business owner can get two separate cards from the same vendor.
This effectively doubles buying power.
Another advantage is that even startups can do this. Visiting a bank for a business loan can be a formula for disappointment. But building business credit, when done right, is a plan for success.
Personal credit scores are dependent on payments but also additional elements like credit use percentages. But for corporate credit, the scores actually just hinge on if a small business pays its bills in a timely manner.
Establishing small business credit is a process, and it does not happen without effort. A corporation must actively work to establish business credit. Nevertheless, it can be done easily and quickly, and it is much more rapid than developing personal credit scores.
Vendors are a big component of this process.
Doing the steps out of order will lead to repetitive denials. No one can start at the top with corporate credit. For instance, you can’t start with store or cash credit from your bank. If you do you’ll get a denial 100% of the time.
A business must be reliable to lending institutions and vendors. That is why; a business will need a professional-looking web site and e-mail address, with website hosting from a company like GoDaddy.
And also business phone and fax numbers must have a listing on ListYourself.net.
Additionally the company telephone number should be toll-free (800 exchange or comparable).
A company will also need a bank account dedicated purely to it, and it needs to have every one of the licenses necessary for running. These licenses all must be in the particular, correct name of the small business, with the same company address and telephone numbers.
So note that this means not just state licenses, but potentially also city licenses.
Visit the Internal Revenue Service web site and get an EIN for the company. They’re free of charge. Pick a business entity like corporation, LLC, etc.
A small business can start off as a sole proprietor. But they will probably want to switch to a variety of corporation or partnership to lessen risk and make best use of tax benefits.
A business entity will matter when it pertains to tax obligations and liability in case of a lawsuit. A sole proprietorship means the owner is it when it comes to liability and tax obligations. Nobody else is responsible.
If you run a business as a sole proprietor, then at least be sure to file for a DBA.
If you do not, then your personal name is the same as the small business name. Because of this, you can find yourself being personally accountable for all business debts.
In addition, per the IRS, using this arrangement there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 possibility for corporations! Avoid confusion and noticeably reduce the odds of an Internal Revenue Service audit at the same time.
Start at the D&B web site and get a cost-free DUNS number. A DUNS number is how D&B gets a company into their system, to produce a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s web sites for the business. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for correctness and completeness. If there are no records with them, go to the next step in the process.
In this way, Experian and Equifax will have activity to report on.
Vendor Credit Tier
First you need to establish trade lines that report. This is also referred to as the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score.
And with an established business credit profile and score you can begin getting retail store and cash credit.
These kinds of accounts often tend to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But to start with, what is trade credit? These trade lines are credit issuers who will give you starter credit when you have none now. Terms are in most cases Net 30, versus revolving.
So if you get approval for $1,000 in vendor credit and use all of it, you need to pay that money back in a set term, like within 30 days on a Net 30 account.
To kick off your business credit profile the proper way, you need to get approval for vendor accounts that report to the business credit reporting bureaus. As soon as that’s done, you can then use the credit.
Then pay back what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help in the same way true starter credit can. These are vendors that will grant an approval with hardly any effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
But you may need to apply more than once to these vendors, and you may need to purchase some things you don’t need to have, to validate you are responsible and will pay punctually. Consider giving nonessential things to charity.
Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, then progress to the retail credit tier. These are service providers like Office Depot and Staples. These companies are more likely to have goods you need.
Use the corporation’s EIN on these credit applications.
One example is Lowe’s. They report to D&B, Equifax and Business Experian. They need to see a DUNS and a PAYDEX score of 78 or higher.
Are there 8 to 10 accounts reporting? Then move onto the fleet credit tier. These are businesses such as BP and Conoco. Use this credit to purchase, repair, and take care of vehicles. Make sure to apply using the business’s EIN.
Have you been responsibly handling the credit you’ve gotten up to this point? Then move to the cash credit tier. These are service providers like Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
These are companies such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are normally MasterCard credit cards. If you have 14 trade accounts reporting, then these are in reach.
Know what is happening with your credit. Make certain it is being reported and attend to any inaccuracies as soon as possible. Get in the practice of checking credit reports and digging into the specifics, and not just the scores.
We can help you monitor business credit at Experian and D&B for only $24/month. See: https://www.creditsuite.com/business-credit-monitoring. Update the information if there are mistakes or the data is incomplete.
So, what’s all this monitoring for? It’s to challenge any mistakes in your records. Mistakes in your credit report(s) can be fixed. But the CRAs typically want you to dispute in a particular way.
Disputing credit report inaccuracies generally means you mail a paper letter with copies of any evidence of payment with it. These are documents like receipts and cancelled checks. Never mail the original copies. Always mail copies and retain the originals.
Fixing credit report inaccuracies also means you precisely detail any charges you contest. Make your dispute letter as crystal clear as possible. Be specific about the concerns with your report. Use certified mail so that you will have proof that you mailed in your dispute.
Always use credit smartly! Don’t borrow more than what you can pay back. Track balances and deadlines for payments. Paying off in a timely manner and completely will do more to elevate business credit scores than pretty much anything else.
Building company credit pays off. Excellent business credit scores help a corporation get loans. Your loan provider knows the small business can pay its financial obligations. They understand the company is bona fide.
The business’s EIN attaches to high scores, and loan providers won’t feel the need to demand a personal guarantee.
Once you learn what affects your company credit score, you are that much closer to creating improved corporate credit. Learn more here and get started with how to build business credit attached to your company’s EIN and not your SSN.