Essential Steps in Building Business Credit

Step 1: Establish Your Business as a Separate Legal Entity

To build business credit, your business must be recognized as a separate entity from you personally. This involves:

1. Choose a Business Structure: Form a corporation (C-corp or S-corp) or a limited liability company (LLC). Sole proprietorships and partnerships don’t separate personal and business credit.
2. Register Your Business: Register your business with your state and obtain the necessary licenses and permits.
3. Get an Employer Identification Number (EIN): Apply for an EIN from the IRS. This is like a Social Security number for your business and is required for tax filings, opening a business bank account, and applying for credit.

Step 2: Open a Business Bank Account

1. Separate Business and Personal Finances: Open a dedicated business checking account to manage your business income and expenses.
2. Use the Account Regularly: Deposit revenue and pay business expenses through this account to establish a financial history.

Step 3: Register with Business Credit Bureaus

Business credit bureaus track your company’s credit history. The major ones include:

1. Dun & Bradstreet (D&B): Apply for a free D-U-N-S Number, which is required to establish a credit file with D&B.
2. Experian Business: Ensure your business is listed with Experian.
3. Equifax Business: Verify your business information with Equifax.

Step 4: Establish Trade Lines with Vendors

1. Work with Vendors That Report to Credit Bureaus: Not all vendors report payment history to business credit bureaus, so choose those that do.
2. Set Up Net-30 Accounts: Many vendors offer net-30 payment terms, meaning you have 30 days to pay your invoice. Paying on time (or early) helps build your credit.

• Examples of vendors that report include Uline, Grainger, and Quill.

3. Pay on Time or Early: Timely payments are critical for building a positive credit history.

Step 5: Apply for a Business Credit Card

1. Choose a Business Credit Card: Apply for a card specifically for your business. Many banks offer business credit cards for startups and small businesses.
2. Use the Card Responsibly: Make small purchases and pay off the balance in full each month to build a strong payment history.
3. Avoid High Utilization: Keep your credit utilization ratio below 30% of your credit limit to maintain a good credit score.

Step 6: Build a Positive Payment History

1. Pay Bills on Time: Late payments can harm your business credit score.
2. Automate Payments: Set up automatic payments to ensure you never miss a due date.
3. Monitor Payment Terms: Understand the terms of your agreements with vendors, lenders, and creditors.

Step 7: Monitor Your Business Credit Reports

1. Check Your Reports Regularly: Review your business credit reports from Dun & Bradstreet, Experian, and Equifax to ensure accuracy.
2. Dispute Errors: If you find incorrect information, file a dispute with the credit bureau to have it corrected.
3. Track Your Progress: Use tools like Nav or CreditSignal to monitor your business credit score.

Step 8: Build Relationships with Financial Institutions

1. Establish a Relationship with a Bank: Open accounts and maintain a good relationship with your bank. This can help when applying for loans or lines of credit.
2. Apply for Small Loans or Lines of Credit: Start with smaller amounts to build a repayment history. Ensure the lender reports to business credit bureaus.

Step 9: Maintain Good Financial Practices

1. Keep Debt Levels Low: Avoid overextending your business with too much debt.
2. Maintain Accurate Records: Keep detailed financial records to demonstrate your business’s financial health.
3. File Taxes on Time: Ensure your business is compliant with tax obligations.

Step 10: Leverage Your Business Credit

Once you’ve built a strong credit profile, you can:

Protect Personal Credit: With strong business credit, you can rely less on personal guarantees for business financing.

Negotiate Better Terms: Use your credit history to negotiate better payment terms with vendors or lower interest rates on loans.

Expand Your Business: Access larger loans or lines of credit to fund growth opportunities.