How to establish credit as a business

Small businesses have the odds stacked against them in regards to getting approved for business funding. To ensure that you’re prepared for the loan application process, you’ll want to be as knowledgeable as possible.

Did you know that your business has a credit score? If you didn’t, you’re not alone. A study found that 45% of entrepreneurs didn’t know they had a business credit score while 72% didn’t know where to go to find information about it.

To start your business off on the right foot, take charge of your business’ credit. Here’s how to establish credit as a business.

Incorporate or LLC Your Business

In order for your business to have its own credit report, as the owner, you must incorporate or form an LLC. If your business is run under a general partnership or a sole proprietorship, the business is legally your name. This means that there is no separation between personal credit and business credit.

By incorporating your business or creating an LLC, you’re able to legally separate your business from yourself. In turn, you can legally open a business credit line or a bank account in your company’s name.

Apply for a Federal Tax Identification Number (EIN)

A federal tax identification number (EIN) is like your business’ social security number. When filing taxes or opening a business bank account, you will need to provide an EIN. Sometimes an EIN is needed in order for larger companies to get paid by their vendors.

To apply for an EIN, you’ll have to submit an application to the IRS. Companies must be located in the U.S. or a U.S. Territory in order to be eligible for an EIN. The business owner must also have a valid tax I.D. such as a social security number.

If you own several companies, note that you can only apply for one EIN a day.

Create a Business Bank Account

Once you have an EIN, you can open a business bank account. Having a business account allows all of your business records to be centralized in one location. A business bank account also helps with taxes and deductions. This is extremely helpful come tax season. In most cases, you can grant your accountant with access to the account, allowing you to focus on other business functions.

With a business checking account, you can accept debit and credit card payments. This is convenient for your customers and broadens who can do business with your company.

Pay Creditors on Time

While each credit bureau uses different methods for determining business credit scores, all of them factor in your business’ payment history. To keep your business credit in good standing, be sure to always pay you creditors on time. If possible, pay before the due date. Paying early allows you to be given a perfect credit score by Dun & Bradstreet.

Making a late payment that is reported to the credit bureaus can be devastating for your business credit score. Be sure to set up automatic payment or schedule reminders to ensure that you never miss a due date.

Borrow From Lenders That Report

It’s worth noting that note all lenders report to the credit bureaus. While this can be good if you’ve missed a payment, using a lender that doesn’t report means that your business credit isn’t impacted at all. If your intent is to borrow money in order to beef up your business’ credit score, confirm with the lender that they report to the credit bureaus.

Traditional banks and small-business lenders, even online lenders, often report to the bureaus. Other lender options, like cash advance companies, don’t typically report. Pick wisely, otherwise you may be borrowing with no impact to your business credit!

Keep Business Credit Information Current

Similarly to your personal credit history, there are three credit bureaus that collect business data and keep track of your business credit score. The three bureaus include Equifax, Experian, and Dun & Bradstreet.

Unlike personal credit scores, business credit scores aren’t as streamlined but each rank businesses on a scale of 0 to 100. Each credit bureau has its own formula that’s used to calculate business credit scores and they all report on different types of data. Because of this, you’ll want to maintain all three to ensure that your business credit scores and reports are accurate.

Some bureaus, like Dun & Bradstreet, allow you to add and update business information like number of employees and time in business. Be sure to check with each credit bureau to ensure you know how to update information as well as how to review your business credit report.

Conclusion

Establishing your business’ credit can be confusing, especially if you don’t know much about it. Be sure to follow these tips to set your business up with a solid credit history. Remember, the better your credit, the better your chances are of getting approved for business loans!