To help you get started, here’s a step-by-step guide on how to build business credit.
While looking for tips to start your own business, you may get the suggestion to improve your personal credit score. It’s because when your business doesn’t have a credit history, your personal credit report plays a major role when you apply for loans or seek partnerships. If you don’t have a high credit score, you may want to look into improving it.
If you have ever used a free mortgage loan calculator, you may know how important it is to use factual information like your income to get helpful estimates. This also holds true for business credit, where having a registered business is key to building an accurate business credit score. You can choose from different business structures like sole proprietorship and limited liability company (LLC) to register your business.
After you have registered your business, you should register for an employer identification number (EIN). Your EIN helps you file taxes and track your finances, which in turn lets you include these factors in your business credit report and build your score. You don’t have to use a tax filing service to get the EIN either: You can simply get it for free, directly from the Internal Revenue Service (IRS).
While your EIN is extremely important for filing taxes and establishing your business as a legitimate entity, your D-U-N-S Number is paramount to tracking your business and its financial data. This unique 9-digit number is issued by Dun & Bradstreet for every physical location of your business and helps keep tabs on your credit report. Whether you are looking for getting the easiest loan or credit card for your business, your D-U-N-S Number comes in handy at every step.
At first, it might seem like a good idea to keep using your personal bank account for convenience. But this creates more problems for you down the line that include but are not limited to tax reporting and credit monitoring. That is why it's critical that you open a business checking account to properly track your transactions. This can go a long way towards improving your business credit score.
Once you have the essentials set up for your business credit and finances, you can go ahead with applying for business credit. In this step, you can look for products like business loans, credit cards, and lines of credit. Similar to how a POS system is valuable for marketing, these credit accounts hold great importance for building your business credit bit by bit.
If you have a low credit score, you may have to put up with challenges like high interest rates. But as your credit limit improves, you can negotiate better terms with lenders and providers. This makes it crucial that you improve your credit score over time.
The following steps can help you in this pursuit.
Making your loan and vendor payments on time can work wonders for your business credit score. You can use a business payment processing service to control your payouts and make payments without a delay.
You can choose to report your trade credit transactions to show that you make your payments on time. Even when you don’t have multiple credit products, this step can make a world of a difference.
The age of your business’ credit history also matters a lot for increasing your credit score. This means that you should try to maintain your oldest business credit account for as long as possible.
Your credit utilization ratio refers to how much of your approved credit you use across lending products like credit cards. Ideally, this ratio should be lower than 30% of your approved credit.
While these steps can help you build your business credit, keeping track of your credit history and score still remains highly important. You can make it a habit to go through your credit report every few months to observe your business’ financial profile.
