Establishing and Building Business Credit
A critical step for any business is establishing a business credit score and knowing what it takes to build your business credit.
One of the benefits of having a business credit score is the ability to separate your business credit score from your personal credit score, that way if one of them happens to be negatively impacted by an event, the other will remain untouched. Another benefit of having a business credit score is, if you maintain it at a prime level, you will be eligible for credit products such as loans, mortgages, insurance, and credit cards, which can help you build and grow your business in a sustainable way.
It is also important to note that business credit scores are for incorporated businesses. This means that if you’re an independent contractor on a gig app such as Uber or Lyft, you won’t need to worry about a business credit score. Instead, you will focus on building your personal credit score since you are a sole proprietorship which doesn’t separate the business from the owner – in this case, business credit and personal are combined.
However if you’re a business owner who has been looking into establishing and learning how to build business credit, read on!
What is a business credit score and what is it used for?
A business credit score is very similar to a personal credit score in that it is used by lenders to determine your business’ creditworthiness. In addition to that, your business credit score will also help lenders determine how much credit you are eligible for, and perhaps most importantly, what rates you will have to pay when you use that credit. Also similar to a personal credit score, a business credit score takes time to build.
Where they differ is how they are scored. A personal credit score can range between 300-850, whereas business credit scores are typically scored on a scale of 1-100. Another way that business credit scores differ from personal is that, unlike personal credit scores, business credit scores are publicly available (although anyone looking to find that information may need to pay a small fee).
With a positive business credit score, you can:
- Qualify for lower insurance premiums associated with your business
- Protect your personal credit and limit personal liability
- Legitimize your company in the eyes of anyone — investors, partners, clients, or vendors
- Qualify for preferred rates and fees when taking out credit in your business’ name
Setting up your Business Credit Score
Before you can begin building your business credit score, you must first take the following steps to set up your business to have a credit score:
- Incorporate your business. Incorporating your business or forming an LLC (limited liability company) will ensure your business and personal identities will be separate.
- Obtain a federal employer identification number (EIN). You can apply for an EIN for free through the IRS by going here. This number is essentially an SSN for your business and is required to open a business bank account and file taxes for your business.
- Establish a dedicated business phone number. This further legitimizes your company. Just ensure it is listed under your legal business name.
- Open a business bank account. Open a business account in your company’s name. This should also be the account where any financial transactions related to your business are paid to and from. Once you have a business credit card or loan, you will be able to make payments towards these accounts using your business bank account.
- Establish your business credit. Open up a credit card account, loan, or line of credit under your business to begin building your business credit score.
- Work with vendors that report to credit bureaus. Try to work with as many vendors as you can that report payments to credit bureaus to start building your business credit score.
- Pay those vendors on time – or even early. Similar to your personal credit score, late payments will negatively affect your business credit, so you should always aim to repay your vendors on time to keep your business credit in good standing.
Maintaining your Business Credit Score
Once you have your business credit account set up and have taken out some credit in your business’ name, you will need to develop good habits to maintain a favorable credit score. If you’re curious about how to build business credit fast, one of the best ways to build business credit is paying your vendors on time or even early. Some credit bureaus, such as The Dun & Bradstreet PAYDEX score, will grant the highest score for businesses that pay their vendors early.
To maintain a good business credit score, it is also pertinent to regularly monitor your credit score to ensure that all accounts are in good standing and that you have not had credit taken out in your business’ name without your knowledge or permission.
Finally, another great way to build or improve your credit score is to reduce your credit utilization rate (CUR). This is the amount of debt you currently have compared to the amount of credit you have access to. Generally speaking, it is a good rule of thumb to keep your CUR below 30%. To keep your CUR low, we recommend paying down as much of your debt as possible. Another method is to continually accept credit limit increases without actually using the additional credit. But only do this if you can stay within a 30% limit of your approved credit limit.
Establishing a business credit score is an important step for businesses to take if they want to take advantage of preferential credit rates and insurance premiums, among other benefits. Although building your business credit can take time, it can provide substantial payoffs, such as financial savings, and a safety net, in the long run. It also helps to legitimize your business and garner appeal from investors and vendors.
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