How Do Businesses Build Their Credit Score

Whether you are a start-up or an existing business undertaking a new expansion effort, it’s crucial for small business owners to have access to credit and business financing. Establishing an active credit profile with diverse accounts separate from your personal engagements is key to achieving your business’s financial plans.

Why is it important for my business to establish credit?

If you are reading this, chances are you already understand the importance of having a good credit score. Similar to your consumer score, good business credit can help your business gain access to better borrowing interest rates, secure more favorable trade terms with suppliers, and reduce instances in which you need to prepay for services and products. In the long run, an excellent credit score can help you access the assets or funds that will help your business grow, while saving you money.

Unless you are operating your small business as a general partnership or sole proprietorship, you’ll need to demonstrate a separation between owners and the business. One of the key benefits of limited liability companies (LLC) and corporations is the protection they provide owners over their personal assets. By separating your business’s credit from your personal credit, you minimize any adverse effects one might have on the other.

Establishing Business Credit

  1. Get incorporated. If you haven’t already, you’ll want to consider incorporating your business. By adding an LLC. or Inc. to your business, you will legally separate your business dealings from your personal profile. If you don’t do this, your personal credit history and business will remain legally attached.
  2. File for a federal tax identification number (EIN). An EIN is fundamentally a social security number for your organization. It’s required to open a business bank account for your LLC or corporation and federal tax filings. Your EIN is what creditors will use to review and report your business’s credit history.
  3. Open a business bank account. Open a business account from your bank of choice in your legal business name. Be sure that your business conducts all of its financial transactions from this account. If you open a credit card for your business, you’ll also want to use this account to pay your bills.
  4. Establish business credit files. Before you go about obtaining credit for your business, you’ll want to open a business credit file with each of the three reporting agencies: TransUnion, Equifax, and Experian.
  5. Obtain a business credit card. You should obtain at least one credit card that does not link to you or any other owners of your business. Choose a creditor that reports to all three major credit-reporting agencies.
  6. Establish a line of credit with suppliers or vendors. Work with your suppliers and vendors to help create credit for your organization when you make purchases with them. Ask them to report your payment history to the three major credit-reporting agencies.
  7. Pay on time. This may seem obvious, but it’s easily the most important. Once you set up positive credit relationships, it’s important to honor your agreements. Late payments, just like with your personal credit, will negatively affect your score, damaging your business reputation and limiting your borrowing options.

Building Business Credit

Once you establish your business’s credited, the next step is to maintain a healthy credit portfolio. Monitoring your business’s credit can help minimize potential errors while giving you an idea of how your business is improving. To boost your commercial credit history, follow these critical steps.

Always pay early. Creditors are going to favor borrowers that don’t just pay their debts on time, but pay early and above the minimum amount. Your company’s credit report is going to be more detailed than your personal credit reports. The faster you can pay, the quicker you may build a positive credit history.

Second, you will want to make sure that your creditors are reporting to each of the credit bureaus. Not all lenders and vendors report to commercial credit agencies, so it’s important to know if your accounts are helping with your scores. To better your credit portfolio faster, work with borrowers that report to all three credit bureaus.