Published By Janet Gershen-Siegel at March 17, 2018
Do you know what goes into establishing credit for a business? We do, and in this post we will show you how to get going with establishing business credit.
Business credit is credit in a small business’s name. It doesn’t attach to an owner’s personal credit, not even when the owner is a sole proprietor and the only employee of the business. Accordingly, an entrepreneur’s business and personal credit scores can be very different.
Given that small business credit is distinct from individual, it helps to safeguard an entrepreneur’s personal assets, in the event of litigation or business insolvency. Also, with two distinct credit scores, an entrepreneur can get two different cards from the same vendor. This effectively doubles buying power.
Another benefit is that even start-ups can do this. Visiting a bank for a business loan can be a recipe for disappointment. But building business credit, when done right, is a plan for success.
Personal credit scores depend on payments but also other factors like credit usage percentages. But for company credit, the scores really merely hinge on whether a small business pays its bills punctually.
Establishing small business credit is a process, and it does not happen without effort. A company will need to proactively work to build small business credit. Having said that, it can be done readily and quickly, and it is much speedier than building individual credit scores.
Merchants are a big component of this process.
Performing the steps out of sequence will cause repetitive rejections. Nobody can start at the top with corporate credit. For example, 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 corporation has to be legitimate to lending institutions and merchants. That is why, a corporation will need a professional-looking web site and e-mail address, with website hosting bought from a merchant such as GoDaddy.
And also business telephone and fax numbers need to have a listing on 411.com.
In addition the company phone number should be toll-free (800 exchange or similar).
A business will also need a bank account dedicated only to it, and it must have all of the licenses essential for operating. These licenses all must be in the accurate, accurate name of the business, with the same business address and telephone numbers.
So bear in mind that this means not just state licenses, but potentially also city licenses.
Visit the Internal Revenue Service website and get an EIN for the corporation. They’re free of charge. Select a business entity such as corporation, LLC, etc.
A small business can start off as a sole proprietor. But they will most likely wish to change to a sort of corporation or partnership to diminish risk and make the most of tax benefits.
A business entity will matter when it concerns tax obligations and liability in case of litigation. A sole proprietorship means the business owner is it when it comes to liability and tax obligations. No one else is responsible.
If you run a company as a sole proprietor, then at least be sure to file for a DBA (‘doing business as’) status.
If you do not, then your personal name is the same as the company name. Consequently, you can end up being personally accountable for all small business debts.
Plus, according to the Internal Revenue Service, by having this structure there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 probability for corporations! Avoid confusion and dramatically decrease the chances of an IRS audit simultaneously.
Start at the D&B website and get a free DUNS number. A DUNS number is how D&B gets a corporation in their system, to generate 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 websites 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.
By doing so, Experian and Equifax will have something to report on.
First you need to build trade lines that report. This is also called 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 start obtaining retail store and cash credit.
These types of accounts tend to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But first off, what is trade credit? These trade lines are credit issuers who will give you preliminary credit when you have none now. Terms are normally Net 30, instead of revolving.
So if you get an approval for $1,000 in vendor credit and use all of it, you will need to pay that money back in a set term, like within 30 days on a Net 30 account.
Net 30 accounts need to be paid in full within 30 days. 60 accounts have to be paid in full within 60 days. Unlike with revolving accounts, you have a set time when you must pay back what you borrowed or the credit you used.
To begin 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 make use of 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 very little effort. You also need them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
You want 5 to 8 of these to move onto the next step, which is the retail credit tier. But you may need to apply more than one time to these vendors, and you may have to buy some items you don’t need to have, to validate you are dependable and will pay punctually. Consider donating unwanted items to charity.
You can find Uline’s website here. This company sells shipping, packing, and industrial supplies. These include janitorial supplies, shipping boxes, and material handling products like hand trucks and dollies. Most importantly, they report to Dun and Bradstreet.
Therefore, your small business must have a DUNS number before you start trying to get vendor credit with them. Uline will ask for two references and a bank reference.
Your first few orders might need to be pre-paid to initially so that your company can get approved for Net 30 terms.
You can check out Quill online here. They sell office, packaging, and cleaning supplies. Their products also include toner, office furniture, and even coffee and snacks. You can even get your company’s coffee maker through them.
They sell office, packaging, and cleaning supplies, and they report to D&B and Experian.
Because Quill reports to two separate credit reporting bureaus, you get two credit experiences with them. Place an initial order first unless the D&B score is developed.
Generally they’ll put you on a 90 day prepayment schedule. If you order items every month for 3 months, they will commonly approve you for a Net 30 Account.
Grainger Industrial Supply is likewise a true starter vendor. Find them online at https://www.grainger.com/. They sell safety equipment, plumbing supplies, and more, and they report to D&B. You will need to have a business license, EIN, and a DUNS number. For less than $1000 credit limit they will approve almost anybody with a business license.
Non-Reporting Trade Accounts can also be helpful. While you do want trade accounts to report to at least one of the CRAs, a trade account which does not report can still be of some worth. You can always ask non-reporting accounts for trade references. Additionally credit accounts of any sort ought to help you to better even out business expenses, therefore making budgeting easier. These are providers like PayPal Credit, T-Mobile, and Best Buy.
Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, then move onto the retail credit tier. These are service providers such as Office Depot and Staples. These companies are more likely to have goods you need.
Use the business’s EIN on these credit applications.
Are there 8 to 10 accounts reporting? Then move to the fleet credit tier. These are businesses like BP and Conoco. Use this credit to purchase, repair, and take care of vehicles. Make certain to apply using the business’s EIN.
One such example is Shell. They report to D&B and Business Experian. They need to see a PAYDEX Score of 78 or better and a 411 small business phone listing. Shell might claim they want a particular amount of time in business or profits. But if you already have enough vendor accounts, that won’t be necessary and you can still get an approval.
Have you been responsibly handling the credit you’ve up to this point? Then move onto the cash credit tier. These are companies like Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
These are businesses such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are usually MasterCard credit cards. If you have 14 trade accounts reporting, then these are doable.
Know what is happening with your credit. Make certain it is being reported and take care of any inaccuracies as soon as possible. Get in the habit of checking credit reports and digging into the details, and not just the scores.
We can help you monitor business credit at Experian and D&B for 90% less than it would cost you at the CRAs. See: https://www.creditsuite.com/business-credit-monitoring. Update the data if there are errors or the relevant information is incomplete.
So, what’s all this monitoring for? It’s to contest any problems in your records. Mistakes in your credit report(s) can be corrected. But the CRAs typically want you to dispute in a particular way.
Disputing credit report errors commonly means you mail a paper letter with copies of any proof of payment with it. These are documents like receipts and cancelled checks. Never mail the original copies. Always send copies and retain the originals.
Fixing credit report errors also means you precisely spell out any charges you challenge. Make your dispute letter as understandable as possible. Be specific about the problems with your report. Use certified mail so that you will have proof that you mailed in your dispute.
Always use credit responsibly! Never borrow more than what you can pay off. Keep track of balances and deadlines for repayments. Paying off on schedule and fully will do more to boost business credit scores than virtually anything else.
Growing corporate credit pays off. Excellent business credit scores help a company get loans. Your lending institution knows the business can pay its debts. They understand the corporation is for real.
The company’s EIN links to high scores, and lenders won’t feel the need to require a personal guarantee.