Separating your business from your personal finances is crucial. Credit is a key aspect. Learn how to establish and build business credit.
Estimated reading time: 5 minutes
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Table of contents
- Importance of credit for your business
- How to establish and build business credit
- Monitor your business credit
Importance of credit for your business
Establishing and building business credit will help you grow your company. When you get a loan for your business, lenders will make a decision based on your business credit score.
Related: Why your business needs a website
Like your personal credit score, a good business credit score can result in lower interest rates or insurance premiums. It’ll also help you get better terms with suppliers or vendors.
Even if you don’t need a loan, taking the time to build your business credit score is important. It’ll benefit the overall financial health of your business and separate your business credit score from your personal credit score.
How to establish and build business credit
Take the following steps to establish and build your business credit score.
1. Form your business with an Employer Identification Number (EIN)
The first thing you must do is to form your business separate from your personal life.
To do this, incorporate your business or form an LLC and get an Employer Identification (EIN) number from the Internal Revenue Service (IRS).
Related: How to get an EIN
Forming your business with an EIN will ensure that your business is seen as a separate entity.
A common business structure is a sole proprietorship. It isn’t seen as a separate entity because it’s combined with your personal finances.
That’s why incorporating or forming an LLC with an EIN is the best route to take for building business credit in the long-term.
2. Get a DUNS number
The next step is to get a DUNS number from Dun & Bradstreet. It stands for Data Universal Numbering System and is a unique nine-digit identifier for your business.
It’s used to maintain relevant and up-to-date credit information about your business.
It’s also commonly used by lenders and potential business partners because it helps predict the reliability and financial stability of your business.
3. Open a business bank account
Once you’ve formed your business and have an EIN, it’s time to open a business bank account.
To keep your personal bank accounts and activity separate, a business bank account is required.
It’ll give you a place to run your business finances, build a savings account, and put money aside for taxes.
You’ll also establish a business relationship with a financial institution, which can help you with lending options and approvals.
Professionalism, compliance, and protection are key reasons to open a business bank account.
4. Apply for a business credit card
Regardless of the size of your business, a credit card is a must-have. Run all of your business expenses on your business credit card to keep it completely separate from your business finances.
Although the business credit card won’t be reported under your personal credit report, lenders will most likely pull your personal credit history to determine your creditworthiness.
It’s also better to use a credit card for your business expenses because it’s safer when it comes to fraud.
You can also earn many reward points or cash-back based on the card because business spending is typically higher.
5. Establish credit with suppliers and vendors
Your relationship with your suppliers and vendors is important. Not all vendors and suppliers will report to business credit reporting agencies, so it’s important to find ones that do.
If you buy supplies and other materials for your business, apply for net terms. It’s an agreement with the supplier or vendor that you’ll pay the full payment amount within a specific number of days of the invoice date. Common terms are net-30, net-60, and net-90.
It’s better if you have multiple suppliers and vendors that report to the business credit reporting agencies because it’ll show up as multiple trade lines.
If you’re a home-based business or don’t have many supplies, set-up a phone number under your business. If you pay utility bills for your business, make sure it’s under your business.
6. Always make your payments on time
Any time you borrow money, pay it back on time. If possible, pay it back in full. By making your payments on time, you’ll build a good business credit score.
With a good business credit score, you’ll increase your likelihood of getting loans, increased credit limits, better terms, and interest rates.
Monitor your business credit
Errors can occur, and if you don’t monitor your business credit, it can go unseen.
Proactively monitor your business credit to make sure all of the information that’s being reported is correct. If you find an error, initiate a dispute immediately.
Start building your business credit score as soon as you can because it’ll take time. Even if you don’t currently need a business loan, building your business credit will ensure that you have established credit if you need one in the future.
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Featured image courtesy of Unsplash.
About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.