A Comprehensive Guide to Establishing Business Credit

Recognizing the significance of business credit

Keeping cash flow vivacious is one of the most challenging things about managing a small business. You may have to borrow money to make up the difference when the flow becomes barely noticeable. You might also need to take out loans to finance an expansion project.

Favourable interest rates and more accessible loan and credit line qualifications are two benefits of having good business credit. It's critical to comprehend how business credit operates and what you can do to raise your credit score if you're just starting.

Importance of Business Credit

Business credit can help you qualify for loans or credit lines when you need money. Business credit works the same way as personal credit. If your company has a solid credit history, getting approved for credit lines through your suppliers and vendors may also be more straightforward.

As a business owner, your ability to obtain credit and financing may be necessary for your overall success. For example, if a client fails to pay their bill on schedule and requires funds to pay your staff's salaries, you can use your excellent credit history to obtain a short-term loan. Likewise, managing your company's cash flow may be simpler if you can finance the purchase of supplies or hire vendors for services.

Good business credit can also save you money when you borrow money. Your credit score increases your chances of being eligible for the best rates on loans and vendor financing.

How to Check and Monitor Business Credit Scores

If you want to check your credit scores and business credit profile, you have a few options. It is crucial to remember that each business may have a unique method for gathering and arranging business credit data.

Dun & Bradstreet

Businesses with a credit file can obtain free credit reports and scores from Dun & Bradstreet (D&B). An initial requirement for creating a credit file with Dun & Bradstreet is getting a data universal numbering system (DUNS) number. This nine-digit number uniquely identifies your company. The D&B website allows you to apply for a DUNS number at no cost.

After you complete that, CreditSignal will provide you with access to your D&B PAYDEX score. When you register, you'll also receive free credit monitoring. PAYDEX scores are based on past payment history and range from 1 to 100. A higher score suggests a greater likelihood of on-time bill payment for your company.

Equifax Business

Businesses in various industries, such as financial services, healthcare, manufacturing, and retail, can obtain business credit reports from Equifax. The purpose of the Equifax Business Credit Report is to assist you in identifying potential credit risks, both present and future, to your company.

Equifax Core Credit offers a free credit score every month. You can also view your updated Equifax Business Credit Report. For additional information, you must fill out the contact form on the Equifax website.

Experian Business

Experian provides small businesses instant online access to credit reports. By entering the company's name and address, you can check its business credit or that of any other company.

If you would like to check your credit regularly, you may also want to consider signing up for Experian Business Credit Advantage.

Steps to Establish Business Credit

If you're ready to establish business credit, it helps to know where to start. Follow these steps to create a business profile.

1. Register the Business and Obtain an EIN

Your business is legal on paper if it is registered with the appropriate authorities. You may need to write formally depending on your business structure and the state laws in effect.

Additionally, you might have to submit an application to the Internal Revenue Service (IRS) for an Employer Identification Number (EIN). The IRS uses this number to identify your company for taxation purposes. An EIN application is available on the IRS website.

2. Open a Business Bank Account

While having a business bank account is beneficial for several reasons, establishing business credit is only sometimes necessary. Setting a distinct bank account for your business gives it more credibility. Moreover, it facilitates separating business and personal expenses, which can be helpful during tax season.

To open a business bank account, you might be required to provide your EIN. When choosing a bank, looking into fees, other account features, and minimum opening deposit requirements is useful.

3. Establish a DUNS Number

As mentioned, you will need a DUNS number to create a business credit profile with Dun & Bradstreet. This number can be requested for free online.

You don't have to ask Equifax or Experian for a unique identification number. Once businesses you borrow money from report your account activity, the credit bureaus can start constructing your business credit profile.

4. Consider a Business Credit Card

The purpose of business credit cards is to facilitate the acquisition of necessary items to maintain your business's operations. It is usually optional to have any business revenue to be approved for a business credit card based on your credit scores.

As you compare business credit cards, remember to consider:

• Rewards, if the card has a rewards program

• Fees, including the annual fee and foreign transaction fees

• Annual percentage rate (APR) for purchases and balance transfers

• Your initial credit limit may be low, but you could increase it by making on-time payments and paying your card in full monthly.

5. Establish Vendor Credit

Getting a small business loan might not be possible now if you're just starting with your business credit. On the other hand, you can obtain credit lines via your suppliers or vendors.

Vendor credit, or trade credit, enables you to purchase goods from your suppliers now and pay for them later. If your vendors submit information to Dun & Bradstreet or another credit agency, your account history can assist you in establishing business credit.

Strategies to Improve Creditworthiness

Your ability to repay loans, whether taken out on your own or for your business, is measured by your creditworthiness. Talking about the implications for small businesses requires addressing the "five Cs of credit."

The five Cs of credit are five standards that creditors can apply to determine a borrower's creditworthiness. They are listed in the following order:

• Capacity: Based on your present and anticipated future cash flow, the degree describes your company's ability to take on debt and repay it.

• Capital: The amount of skin in the game when financing your business is one-way lenders gauge a borrower's creditworthiness.

• Any asset you can pledge as security for a business loan is known as collateral. This can include real estate, machinery, or inventory.

• Conditions: Lenders discuss the overall health of the economy and the anticipated financial performance of your business when they refer to "conditions."

• Character: Your personality reflects your personal and professional qualities. It may cover topics such as your overall reputation in the community, your professional certifications, and your prior business management experience.

Which of the five Cs requires the most excellent attention will determine how you increase creditworthiness. For instance, if your capacity appears lacking on paper, you may improve cash flow and reduce expenses. This could persuade a lender that your company can repay any loans it may incur.

Tips for Maintaining a Good Credit Profile

Maintaining excellent personal and business credit largely depends on responsible credit use. These pointers can assist you in keeping your credit score stable while you establish business credit:

Refrain from taking on more debt than you can pay off with your cash flow.

Maintain a low credit utilization rate on business credit cards—ideally, less than 30%.

Pay all your bills on time, including debt repayment and payments to suppliers and vendors.

Keep a close eye on your company's credit history to spot any alterations that could be detrimental to your credit rating.

Establishing business credit can take some time, so it's critical to maintain consistency in your good financial practices. When trying to raise your credit score to get a business loan, keep in mind that a lender may also consider other factors. The time you've been in business, your yearly income, and the sector in which you operate could all affect your ability to obtain financing.

What Is the Fastest Way to Build Business Credit?

Since you don't need a business credit history to apply, opening a business credit card is one of the quickest ways to build business credit. Even if your business has yet to make money, credit card companies can still approve you based on your credit reports and scores. Establishing good business credit requires timely payments and low credit utilization.

Can I Use My EIN to Get a Loan?

Employer Identification Numbers, or EINs, are acceptable to lenders when applying for a small business loan. Depending on its lending policies, a particular lender may use your Social Security number or EIN to check your credit. Remember that some business owners—sole proprietors, for example—might not require an EIN. Then, you would use your Social Security number to apply for loans.

What was your business credit score when you first Started?

Your score may be zero if you have never established business credit. Your initial score may vary depending on the credit-scoring model you're using to monitor your progress. For example, Dun & Bradstreet PAYDEX scores go from 1 to 100, where 1 is the lowest possible score.

What Is a Good DUNS Number?

100 is the ideal data universal numbering system (DUNS) number for a business. On this credit-scoring system, that is the highest possible score. Nonetheless, a score of 80 or higher is typically regarded as good and means that your company is highly likely to make timely payments and repay its debts.

The Bottom Line

If business owners intend to apply for loans or vendor financing at some point, they should consider building their business credit. Small business loans and credit lines might have better terms than credit cards or personal loans, but you could still use them to finance your operations. It's worthwhile to shop around and compare the best business loans if you need to borrow money while still working on establishing credit.