Building Business Credit

So you finally got your start-up off the ground. Congratulations. Business has been good and now you see an opportunity to expand. Congratulations again. However, expanding generally means financing, and financing means credit. Having good business credit can be the difference from capitalizing on this opportunity to expand or watching on the sidelines as it passes you by. This is why establishing the ground work for financing is so important.

The first (obvious) step is to establish a business name, address, and phone number. No one is going to lend you money if they don’t know where you are located and how to reach you. 

The second (obvious) step is to separate your personal and business finances and information. The aforementioned business information should be different from your personal information. You should open a business checking account and keep your business’s finances separate from your personal finances whenever possible.

 Now that we have moved passed the completely obvious things, incorporating your business in the next step. Deciding between LLC, S-corp, C- corp etc is a whole new can of worms but incorporating will make your business a separate legal entity, which will further distinguish your personal credit from your business credit (are you starting to see a trend here?)

After that, apply for an Employment Identification Number or EIN from the IRS. This will function like your social security number when applying for credit, except for your business. Next, if your business does not already have one, get a DUNS number from Dun & Bradstreet which is the original business credit rating organization. Experian and Equifax also do business credit ratings but they will combine your personal and business credit. This is good for those lucky souls that have both good business and personal credit. If you fall into that category, it is good to have files with Experian and Equifax too, but if not it is better to focus on D&B. 

Now its time to actually start borrowing money. A business credit card is in order. This will allow you to build credit for your business similar to how a personal credit card will allow you to build personal credit. I say “similar” because when you max out a personal credit card, it hurts your credit score, however spending the limit on a business credit card will not affect your business credit. There are other slightly different rules for the two types of cards in terms of how they affect you credit rating which it would be wise to look into.

Another way of building credit through borrowing money which is specific to B2B companies is invoice factoring.  Factoring will enable you to borrow money by leveraging the credit of the people you do business with and is a very affective way to build a credit history. However it is not recommended to factor invoices with the sole purpose of building credit as it its costly, but if your business needs financing this is an affective to secure funds with little to no credit history. This will also help you build credit to qualify for different types of financing in the long term.

The next step in building a credit history is to start taking out small loans from the bank, $1000-3000 and pay them off early. Slowly move up to larger sums of money but be sure to pay them off early if you are taking them out solely to build your business credit.

Finally, apply for a line of credit. This will be a reserve account to finance large orders, seasonal slow periods, whatever comes up.

If you follow these steps you should have great business credit, although, this article is written in a vacuum. No small business owner’s number 1 objective is going to be to build perfect business credit. I highly doubt that a small business will apply for credit cards or loans when it is not needed just to build credit; small businesses can usually make use of all the money they can get their hands on. However it is good to integrate a good credit building strategy into your other business strategies.