Good credit is a valuable business trait—a powerful bargaining chip in business relationships and opportunities. And the best part is that it doesn’t take much to build healthy business credit. Here’s all you need to do:
The first step is to register your enterprise as a legitimate business. Ideally, incorporate your business as a limited liability company (LLC). An LLC keeps your business and personal identities separate, in the legal sense. You can also register as a sole proprietor or independent contractor through a DBA, but this won’t separate your personal and business assets, in which case your personal and business credit go hand in hand.
Once registered, get an Employer Identification Number (EIN). An EIN is not needed to establish business credit, but it's included in credit reports, and some financial transactions may require an EIN.
From there, open a bank account for the business and set up dedicated utilities such as a phone line, physical address (if possible), and directory entries. Credit bureaus will use this public information to populate your credit profile.
A D-U-N-S Number is a unique 9-digit code that identifies your business with the credit bureau, Dun & Bradstreet. If you don’t have a D-U-N-S number, you can simply apply for one from DnB. Other credit bureaus, including Equifax and Experian, also have similar business identifiers, but you don't have to explicitly request them.
Payment history forms the bulk of any credit report. But not all payments make it into the final credit report. No lender or vendor is obligated to report payments or any other transactions to credit bureaus. So, some do while others don’t. You want to open trading and financing accounts with vendors, suppliers, or financial institutions that report payments to the various credit bureaus.
If none of your lenders or vendors register payments with the bureaus, you'll have a very low credit score or no business credit.
Vendor Credit – Vendor credit is when an individual or business offers products or services that your company can purchase on short term financing (typically net 30 terms). There are many vendors willing to extend credit to startups with minimal requirements. In some cases, a vendor may require an initial purchase or deposit prior to extending credit terms.
Supplier Credit – This type of business credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This type of financing is great for conserving cash flow because it gives you time to sell the products you receive from the supplier before having to pay for them.
Retail Credit – Many small and major brand retailers offer store credit cards for businesses. Unless they’re co-branded, the card can only be used in a specific store. This type of business credit may make sense if you have a specific store you regularly use for business purchases.
Service Credit – The easiest form of business credit you can establish for the first time is service credit. Your internet, cell phone, cable, satellite TV, web hosting and other utility services are all agreements your company makes with providers.
Business Credit Cards – One of the most important tools to keep your personal and business purchases separate is a secured or unsecured business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so you can protect your personal credit as well.
Your business credit performance is largely based on the payment history. The more bills you pay on time (or early), the higher the business credit score. So makes sure not to delay or miss any payments because that will reflect poorly on your credit report.
A good rule of thumb when building business credit is not to mix personal and business finances. For instance, ensure that you make all business-related payments through the business's bank account; otherwise, those payments won't reflect in your business credit. Plus, mixing business and personal cashflows is generally bad business and financial management practice—it’s unprofessional and only complicates bookkeeping.
It's important to keep track of your business credit record, ideally through the credit monitoring services provided by credit bureaus. Doing so will help you trace your credit progress and catch any mistakes that might affect your score. Lenders, vendors, and the bureaus themselves can unintentionally report inaccurate information, which you can simply dispute and get rectified.
Many people believe that monitoring business credit will lower the credit score. But that’s not entirely true. There are two types of credit queries: hard and soft inquiries. A hard inquiry happens when you apply for a new line of credit, business loan, or other types of debt. This can have a minimal but temporary effect on your credit score.
On the other hand, soft inquiries are made by lenders and vendors when reviewing your business credit. A soft query also occurs when you check your business’s credit status through either a direct request or credit monitoring tool. Soft inquiries do not affect your business credit.
However, keep in mind that credit inquiries stay on your record for up to two years. And although they may not affect your business credit performance, too many inquiries over a short time period can be seen as a red flag.
