How to Establish Business Credit:- 5 Simple Steps!

priyanshujangid1021
26 Min Read

Post Author

If you want your business to be at a different level, then Business Credit might help you a lot. Business credit allows you to apply for loans, receive better loan terms, get more favorable terms from suppliers, and get access to cash for growth and expansion.

If you want to know how to establish business credit, don’t worry I will tell you everything about how to establish business credit.

About 29 % of failed businesses failed because they ran out of money and according to the federal reserve bank’s 2020 small business credit survey, 36 % of companies were not given loans because of their poor credit score.

So, building your business credit gives you access to more capital to ensure you don’t have cash flow issues and prevents you from having trouble accessing loans and credit lines should you ever need them.

1. What is Business Credit?

What exactly is business credit?

Not to challenge anybody’s intelligence, it’s simply what it sounds it’s credit for your business. Business credit is completely different from the credit tied to the SSN. Business credit is tied to your company’s EIN number or tax id and it is based on your company’s ability to repay its creditors and lenders similar to personal credit.

But the thing about business credit is that the majority of lenders out there if you were to default on your business application it’s possible that can affect your personal credit score, but a little bit more on that later because there are things that you can do to separate your business from the personal side.

We all know that on the personal side, there are credit scores from fico that range from 300 to 850 and affect our everyday lives. Business Credit score varies from zero to a hundred. The majority of reporting agencies for business credit is done in Bradstreet, Experian, and Equifax.

1.1 What Goes into Business Credit Score?

Let’s break down what goes into a business credit score a little bit further.

how to establish business credit
Image by Tima Miroshnichenko on Pexels

Typically, most company ratings take into account your payment history, the age of the debt in your credit history, the risk of the industry’s use of debt, and the size of the business. But like personal credit, the most important factor in business credit is your payment history. Does your company pay its bills on time?

1.2 How You Can Use Business Credit?

Once you establish a profile, there are ethical ways and unethical ways of using business credit so I’ll cover the ethical ways.

To start off you can get access to vendor accounts, revolving business credit lines, credit cards, and most importantly unsecured lines of credit without a personal guarantee. All a personal guarantee means is that your personal credit will not be a determining factor to get business lending. If you want the highest credit limits and the biggest loans with the lowest interest rates the majority of the time a personal guarantee is going to be required because, without a personal guarantee, it really limits the amount of credit that is available to you.

But once you put some skin in the game like your own personal credit score this is where you get access to 30, 50 even a hundred thousand dollars of credit limits on a credit card and this just scratches the surface and it’s just peanuts when it comes to business lending.

The people who tend to worry about personal guarantees are individuals who have less than perfect credit meaning that they have a credit score in the mid-600s or lower but that is okay because there are other ways of building business credit without getting your personal credit score actually pulled.

But, being honest with you, the better your personal credit score is the easier it is and the more access that you’ll get to business credit. However, if you have bad credit right now, there are plenty of accounts out there that help you build business credit without checking your personal credit. So, to get the best access to lending without a personal guarantee requires assets, steady cash flow for years, and a few other factors.

I know that most that are reading this are still in the beginning and not that established so anything that you are doing right now with the intention of making money can be considered a business.

2. The Difference Between Business Credit and Personal Credit

Personal credit is curated mainly by three major credit reporting agencies and you’ve probably heard of them right you have Equifax, Experian, and Transunion, and you as an individual will have a separate profile with each borough, whereas there are many different credit reporting services that exist for businesses with the largest and the best known being done in Bradstreet.

No personal credit scores are measured and scored completely differently than business credit scores. in general, the three credit reporting bureaus use what is called the FICO method which basically summarizes credit scores into a single number so that lenders can see where you stand as well as yourself at a quick glance. On the other hand business credit scores have no particular method for reporting and each credit reporting agency will score and report in its own unique way.

For example, business credit scores may be based on stuff like okay what industry you are in how many employees you have and how many years you’ve been in business and so on but in general, the good news is business credit scores have fewer variables than FICO scores thus it becomes a lot easier to build and improve business credit than it is for personal credit.

3. Why You Should Establish Business Credit?

how to establish business credit
Image by Andrea Piacquadio On Pexels

Generally, there are two types of people okay there are the entrepreneurs who desperately want to raise capital and get business credit and then there are the entrepreneurs who don’t want anything to do with credit anything to do with debt and they think that they will never have a need for it.

And is normal because most people in their entrepreneur journey hate debt, but now that you are a business owner, you have to understand how leveraging capital can help you achieve faster business growth. Because business credit can allow you to do things like purchase more inventory or rent an office or retail space or acquire real estate develop technology and a lot more.

While at the same time leveraging that capital allows you to maintain a positive cash flow and keep your business operations running smoothly. And here’s the thing okay even if you don’t need business credit today you may just maybe have a need for it in the future. For example, let’s say you have a hot product or a service that’s really bumping or an ad campaign that is generating a lot of results but then you ran out of cash to buy stuff like inventory or hire people or run more ads.

Another example you could have a grand business idea that you need to raise capital before and you don’t want to use all your cash to get started, well in that case you will be glad that you at least started establishing business credit early so that you can make your dream a reality much faster.

4. Benefits of Business Credit

There are plenty of benefits when talking about business credit. Some of them are listed below:-

how to establish business credit
Image by Monstera on Pexels

4.1 Separate Your Business and Personal Expenses

The benefit of building business credit is that it keeps the personal and business expenses. This will allow you to keep your personal credit safe.

4.2 Limit Your Liability

This reduces your liability and helps you save money because as you get more and more loans for your business, you can use them. You will get different types of conditions. With revolving credit, you can pay off your debt much more easily because you have a minimum monthly payment or you can get 30 net 16 net bills over 90 days net, which saves you money because you buy products on credit and pay within 30 days or 60 days or even 90 days or more depending on the terms that apply to you as a business.

4.3 Better Rates, Terms, and Credit Approvals

You will get better credit rates, terms, and approvals when you have a good business credit report, not only for the types of credit listed but also for the level of credit limits that are listed on the business credit report.

This will show that you are capable of handling a large and good amount of credit. This means you have a high personal balance and let’s say you want to apply for a personal credit card and the highest credit limit you currently have on your personal credit card is $500. Bank cannot give you a large amount of personal credit. You may get $1,000 with a new credit card or $1500 but that’s usually it, so that’s what we mean when we talk about the business.

4.4 Greater Credit Capacity

It also plays a role in how much credit the business has reported, how much is available because that gages to other vendors or banks and card issuers, what you’re cooked, and what other banks are willing or credit card suppliers are willing to issue you.

So, this gives you greater credit capacity as a business when you have a strong file you can get much more funding and much more credit compared to just relying on personal credit alone.

And you have much more funding opportunities when you build business credit.

4.5 Build Business Asset

Also if when you have a credit file you have an asset for the business and when you have strong business credit, it’s an asset you can have access to work capital and credit when you need it to grow and expand and even scale your business.

5. What Do You Need?

If you want to establish business credit then you need to have some of the important things. The things are listed below:-

What do you need to start?

You need to have first a separate legal entity. You need to have a limited liability company or something sort of a corporation.

5.2 Company Must be in Good Standing

Your Business: If you already have a business and do not yet have a trade credit, you need to ensure that your business has a good reputation with the government.

Depending on which state you are registered in, you may need to pay for the annual report, you can check your state website, research your business and make sure it is in good standing. If it’s not okay, the first thing you want to do is pay the annual filing fee, or if you haven’t paid it for two or three years, pay it and get caught because what happens if When you apply for credit, banks, particularly card issuers, will check that your business has a good reputation with us in the state in which it is incorporated.

If it will not be in a good state then the application for Business Credit can be declined.

5.3 Employer Identification Number and Business Contact Information

Employer to an identification number, you need an EIN number.

https://youtu.be/IokGYChGuB8

You also need your business contact information on hand. So, your business contact information is gonna be obviously the name of your business, your business mailing address, your physical business address, your business phone number, or your business email address.

Those are all things that are very important that you have available because this is what it’s going to be used to create your credit file. If you provide this information on a loan application, this information is then flagged and shared with a credit reporting agency.

A business credit agency or reporting agency created will verify the information and will create a credit report for you. So before you start building your business credit or if you are already in business or just looking to get started, make sure you meet all of these requirements to run a legitimate business, and then feel free to do so using our corporate credit system.

6. Business Credit and Debt Risk

Let’s talk about business credit and debt risk.

how to establish business credit
Image by regularguy.eth on Unsplash

One big downside of business credit that we have to talk about is legal protections. With personal credit, there are what are called consumer credit laws. This will allow you as the consumer to challenge anything on your report and have incorrect information removed by the credit agency.

However, there are no such laws in place for business credit agencies. So, if there is a mistake on your business credit report you would have to hope that the agency corrects their mistake.

This brings to another downside and potential risk which is your personal credit score can be impacted by your business credit score because often times especially when you have no business credit established you must do what is called a personal guarantee which basically means that you are personally responsible for repaying the business credit cards or business loans even if the business fails.

And if that personal guarantee kicks in then that would impact your personal credit score as well and that issuer is able to attack your personal assets. Even if you have an LLC or a limited liability company which some people mistakenly thinks protects them. Without this guarantee then most companies will not approve your application for a credit card or business loan because the risk of non-payment is too high.

So, be on the lookout for this because if you’re applying online or working with someone who isn’t detailed and going over all the stuff with you then you could be agreeing to this without even realizing it.

7. How to Establish Business Credit?

In order to establish business credit you have to follow some of the steps. The steps are listed below and make sure to follow the steps carefully:-

7.1. Step1:- Register Your Business

So, step one is to register your business.

You can sell your products or services again when you are away from home. If you like this stuff, it’s not like business registration. Indeed, you want to take a legal form for your company, e.g. B. an LLC in Scorp or C Corp in your home country.

That is the first step to showing business credit bureaus that you are a legal entity and that they can begin a credit file on you.

7.2. Step 2:- Obtain an EIN ( Employer Identification Number )

Step two is to get an Employer Identification Number or EIN.

You’re familiar with your social security number, you don’t have to tell it to me, you just keep it to yourself, but an EIN is like a social security number but for a business. It is a unique number that will be assigned to no other business throughout life.

Well really forever even if your business closes no other business gets assigned that number. Technically like sole proprietors, partnerships and even single-member LLCs don’t need one. But it’s still useful to have, for one thing, if you end up growing your business and you want to hire employees, you’re going to need an EIN and it’s a big part of establishing your business credit score which is what we’re talking about today.

Getting an EIN is totally free and you can apply for one pretty easily online through the IRS website.

7.3. Step 3:- Open a Business Bank Account

Step three is open a business bank account.

So, getting a business bank account is really smart for a few reasons. Separating your business and your personal finances is a really smart step because come tax time you’re not going to want to have to parse through your personal bank account for all your business expenses one by one and your accountant will hate you as well.

You’re also going to eliminate personal liability because if you mix your personal and your business finances that is called piercing the corporate veil.

8 Reasons To Use A Business Bank Account For Your Small Business

And so if your business is subject to a lawsuit you have some kind of issue you’re not gonna be held personally liable for that and also it establishes business credit. Once you get your EIN you’re gonna want to shop around and choose the business bank account that’s right for you.

7.4. Step 4:- Establish a Business Address and Phone Number

Step four is to establish a dedicated business address and phone number. This is one of the most helpful things to get business credit.

Get yourself a business address and a phone number to establish the business credit. This will help to get your business recognized.

7.5. Step 5:- Apply for a Business DUNS Number

Step 5 is to apply for a business DUNS number.

The largest commercial credit reporting agency of all is Bradstreet, which is also the most famous, and getting a DUNS number is like opening a file with them.

Getting your unique D&B number Number again for free is a bit longer to get the number direct so it’s not necessary at all unless you want to get an SBA loan or government contract in the future but it’s a great example of
always changing and still worth it. As I said, it’s free and easy to do, and you might want to do it in the future, so why not take advantage of your business credit setup right now?

What is a Good Business Credit Score

8. Some Tips to Boost Your Business Credit Score

So at this point, after following these previous steps, you have a pretty solid base for an established company’s creditworthiness.

From now on, it’s all about doing things, which will actually grow your credit rating. Creditworthiness, we have a few pointers on this including:-

8.1. Step 1:- Establish Trade Line

Step number one is to establish trade lines with your suppliers.

Let’s say you work with a vendor or supplier whose type of business you know, involves importing inventory and the like. See if they can give you a trade credit.

The basic meaning of this is that they give you the product and you can pay them a few days or weeks after you receive the items. You’ll also want to see if these providers are reporting your payments to the company’s credit bureaus.

It’s a type of small loan and is treated as such by credit bureaus.

8.2. Step 2:- Business Credit Card

The second thing is getting a business credit card or a line of credit.

These are as you probably know two different products that actually work very similarly.

Obviously, a credit card is a much smaller pool of money typically than a business line of credit but repaying your drawers on either your business credit card or your business line of credit doing that on time and hopefully in full is great for your credit.

8.3. Step 3:- Check Your Business Credit Reports

Step number three is to check your credit reports.

This is really one of the most important step. You have to keep checking your business credit reports and make sure that everything is working correctly.

So, you’re gonna want to check in with all the major credit bureaus to make sure that everything about your business is up to date, and there aren’t any errors on there like maybe a false credit poll which can actually ding your business credit score by a couple of points.

Don’t be afraid to review your credit score it’s something that we should always do with our personal credit score and business credit score is really no different.

9. Frequently Asked Questions

Some questions that have been asked frequently are given below:-

9.1. What is the minimum credit score for Business Credit?

The business credit score range from zero to a hundred and the minimum credit score for business credit is 75.

9.2. Which is the most widely used credit score model for Business Credit?

FICO is said to be the most widely used credit score model for business credit.

9.3. What is tier 3 business credit?

Tier 3 business credit is business lending. This is popularly known as a type of business financing.

9.4. Can you get a business loan without business credit?

It will be really difficult for you to get business loans without business credit. It requires a minimum of 75 credit scores for eligible business loans.

The Takeaway!

This was about the business credit. It has a lot of potential in it and can really make your business from zero to one. Use it wisely and try to maximize your business credit score so that you can have an access to more business credit. One thing that should be there in your mind is the business credit debt, keep that in your mind and try to utilize the credit properly without wasting it. Keep an eye on the business credit history. Try to have a good business credit score.

If you want to read more about it then check this out.

Last Updated on by ritukhare

Stay Connected

Share This Article
Follow:
I am Priyanshu Jangid, doing B.Tech in Computer Science and Engineering. Apart from my interest in Computer Science, I love traveling, reading books, and Writing. Writing is one of my favorite hobbies and I love doing it most of the time. I am also fond of traveling so, I have traveled a lot and traveling has given me so much knowledge. I compete thought out in various competitions, especially in the Writing domain and have won several awards for that. Competing throughout in the national level article writing competition has made a big fan boy for writing and that's what i love to do.