A rock-solid personal credit score isn’t enough to qualify your business for a loan or credit card. Instead, you need to build business credit to help prove the creditworthiness of your company. Luckily, there’s a simple formula to ensure that your business establishes positive credit without any hang-ups or hassles.
If you want your business to qualify for financial products you need to understand what business credit is, where your rating stands, and how you can build credit fast. To help you get started building business credit, we put together a quick guide to the establishing credit the right way.
What Is Business Credit?
For owners of startups and new entrepreneurs, the idea of separating credit histories can seem daunting. But, with a little knowledge, you’ll find that the task is well worth it if you want a reliable source of credit in the long run.
The best way to answer the question “what is business credit” is to simply imagine that it’s a correlate to one’s personal credit rating. However, your personal credit rating determines how trustworthy you are, personally, as a borrower, whereas your business credit score encapsulates how trustworthy your business is to lend to.
If you want to know how to build your business credit you need to understand the credit reporting algorithms that the major bureaus use. Credit agencies like Equifax, Experian, and Dun & Bradstreet assign your business with a credit score to tell prospective lenders how likely you are to pay your debts on time.
Your ability to manage your business credit score can be the deciding factor in whether you secure sustainable financing, or have to end up signing on a bad loan. So, if you want to find out how to establish business credit for the first time you need to be prepared to rack your score up toward the top of the range, typically between 80 and 100.
The Credit-Building Formula
The longevity of your business can often depend on your ability to secure affordable and favorable financing terms. But unless you know how to build business credit fast, chances are you won’t be able to qualify for good credit products.
Before you start to build business credit, it’s important to note that different bureaus use different scoring algorithms. This results in different scores for the same company registered by, say, Equifax and Experian. Score discrepancies arise between credit rating agencies because some vendors only report to some bureaus and not others.
To help you build business credit the right way, we put together a short checklist of steps that every business owner needs to take if they want the creditworthiness of their business to grow.
Establish and Incorporate
First things first, you need to ensure that your business is formally incorporated and is a business entity of its own. This way, your personal credit history and your business’s are kept separate.
The question of how to set up business credit depends on the type of corporate structure that you organize your business under. For tax and credit purposes, there are five distinct types of corporations:
- Limited Liability Company (LLC)
- S Corporation
- C Corporation
- Sole Proprietorship
- Unincorporated Business Entity
If you want to open a business credit file, I recommend structuring under any of the first three models (i.e., LLC, S, or C corp.). This is because, under these arrangements, the owner’s credit score is kept financially and legally distinct from the business’s.
Get a DUNS Number
Establishing business credit begins with applying for Data Universal Number System (DUNS) registration. Developed by Dun & Bradstreet, a DUNS registration provides a unique identification number (a nine-digit code) for your business entity.
Your business will need a DUNS number if you plan on applying for a federal government grant or contract or an SBA loan. The good news is that applying for a DUNS is free, but it may take as long as a month for it to process.
There is no legislation or regulation that requires businesses to have a DUNS. After all, DUNS is not operated or overseen by the government. But a DUNS is necessary if you want to open a credit file with Dun & Bradstreet, which is one of the top reporting agencies in the world.
Don’t Forget Your Personal Credit
Before you ask yourself how to open a business credit file, you must be prepared to maintain a good personal credit rating too. Although your business’s credit might be a legally separate entity, it is crucial that you keep good standing with personal creditors because lenders will check the credit scores of all your shareholders when it comes time to secure financing.
Shareholders with more than 20 percent share percentage can expect to have their personal credit rating checked to ascertain how trustworthy the business is overall.
Update Your Info
There are few things more important for a business owner than to keep your information current with credit bureaus. As a business owner, you need to fill out a complete profile with the top credit rating agencies (D&B, Equifax, and Experian).
Maintaining up-to-date information with all three of the major credit agencies is imperative for business owners since any lender or supplier could check your credit report from any of the three. Since each agency carries different information about you, you need to keep all three complete.
Keep Your Credit Report Diverse
After you’ve established your business’s creditworthiness, you need to broaden your profile to include accounts from multiple creditors. Here are some of the top components that should be included in your company’s credit report:
- Personally guaranteed business credit card
- Vendor lines of credit
- Business credit card
- Small business line of credit
- LLC credit card
When you diversify your credit report, your company’s reputation gets a major boost in the eyes of creditors. Later down the road, when it comes time to secure major contracts or loans, you’ll be glad you have such a strong and reputable credit portfolio.
Monitor Your Credit Using Tools
You can keep an eye on your business’s credit score by taking advantage of free software that automatically notifies you whenever your credit rating changes. With tools like these in your arsenal, you can make changes whenever necessary to adjust your credit quickly after a sudden drop.
Another ancillary benefit of knowing the up-to-the-minute status of your business credit score is that you can detect identity theft. Shielding your business from identity theft is one of the most important priorities you should have as a business owner because it only takes a few minutes for thieves to rack up insurmountable bills in your company’s name.
Keep It Consistent
To build business credit correctly, you need to be prepared to play the long game. Keeping the same physical address, company name, and phone number on all public records, registries and correspondence can go a long way in establishing your business entity’s permanence and longevity in the eyes of lenders. In turn, your consistency pays off in the form of credibility.
Build Business Credit Fast
One of the fastest stepping stones to build business credit fast is to apply for a secured business credit card (such as an “LLC credit card”). Since these “secured” credit cards are backed by a deposit, they are far easier to qualify for than unsecured business cards. The result is that you can get business credit fast when you’re just starting out.
If you want to build business credit in 30 days or less, a secured business credit card is your best bet. With a deposit of, say, $1,000 you can qualify for a credit limit of an equal amount. In the event that you default, the creditor eats your deposit.
Knowing how to build business credit fast is only half the battle. Once you have your foot in the door with a secured business card, you can start applying for more favorable borrowing instruments such as a business line of credit or a regular LLC credit card.
Why You Need Good Business Credit
If you want to get business credit or want to find out how to build your business credit, you must first understand the motivation behind accruing a positive business credit score. When you maintain a diverse credit report and have a good payment history, your trustworthiness builds with banks and lenders.
Over time, your ability to get business credit will become the deciding factor in whether you qualify for cash flow loans and other financing options on favorable terms. When funding gets tight, there’s hardly anything more reassuring than knowing that you have reliable, low-interest sources of credit on tap—but it all starts with knowing how to build business credit the right way.