Why don’t more small business owners establish credit for their businesses?
The likely answer is because many don’t know how to get started and where to find the right credit sources. We all pretty much know how personal credit works and what it takes to build positive FICO® scores.
The good news is the process of getting business credit is not all that different from building your personal credit. Today we’re going to simplify the business credit building process in five easy steps.
Step 1- Set up a formal legal structure for your business
Most small business owners start out as a sole proprietorship, but the benefits of converting to a formal structure such as a limited liability company or corporation have many advantages.
First, it formally separates you from your business, which is one of the main reasons for building business credit. It’s about the separation between you and your business, both from a liability and financial standpoint.
As an LLC or corporation, you protect your personal assets and have more privacy.
As a sole proprietor, you use your personal information and social security number for everything in the business. As an LLC or corporation, you use your company’s information and can even use a registered agent for the company address.
Your Employer Identification Number (EIN) is used instead of your social security number in all aspects of the business, such as credit applications, business bank accounts, business credit files, etc.
This is just the starting point. Before being approved for business credit, you must meet 10 credibility and lending compliance standards.
I share them in my 10-Point Business Credit Checklist, which you can see and print here. 💃🏾
Step 2- Set up operations
Unfortunately, when it comes to setting up a business, many small business owners fail miserably because they lack any real practical experience in operating a business.
For starters, set up the phone number, address, and bank account for the business. Even if you don’t have an actual storefront or office location, you can still run your business from anywhere and still have a qualifying business address by using a virtual office solution.
Next, establish the company’s web presence by first registering a domain name and then setting up a company website and dedicated email address. Although these are just a few of the steps to setting up operations, they by no means cover it all. Other crucial areas include but are not limited to, knowing your numbers, setting up budgets, forecasts, technology, product fulfillment, customer retention, etc.
Step 3- Obtain trade credit and revolving lines of credit
You can start acquiring credit and financing for your business once a formal legal structure is established and business operations are in place.
For starters, consider applying for credit from vendors and suppliers that cater to start-ups and small businesses with little to no credit history. These are starter vendors, which usually offer net 30-day account terms and approve almost any business for credit.
Once you open an account with a starter vendor, be sure to use the credit line consistently to grow your business and pay your invoices on time. This will enable you to build a payment history and strong business credit ratings.
Important: There are over 500,000 vendors extending credit to businesses, but less than 6,000 actively report to the business credit reporting agencies. Ask your vendors do they report payments to the business credit bureaus to ensure you’re able to build business credit.
Step 4- Add existing trade references to your profile
Getting new credit is not the only way to start establishing credit for your business. The absolute fastest way to build your company’s credit file is by adding existing trade references to your D&B business credit report.
In reality, not all vendors and suppliers share payment data to a business credit reporting agency. If your business has a credit account with a non-reporting vendor or supplier then consider using a service like eCredable to add positive payment experiences to your file.
You can add the following trade references:
- Payments for rent/lease
- Payments to vendors
- Utilities and gas companies
- Landlords
- Suppliers
- and so much more
Step 5- Pay EVERYTHING on time (or early)
Just like building personal credit, it’s extremely important to pay your accounts on time, every time. Paying your accounts late will severely hurt your chances of building strong business credit scores, and getting better offers for financing down the line. Plus, if you do pay late, fixing it will be nearly impossible.
If you want excellent business credit that racks in high-limit approvals of $50k+, paying on time (or early) is the best course of action.
The Bottom Line
How lenders, suppliers, and vendors view your overall business is crucial to maximizing your funding potential. The stronger your business credit files and scores, the easier it will be for lenders to assess your business’s creditworthiness.
Looking for a step-by-step business credit-building plan? Become an FCU member and learn the steps to making drastic strides towards getting the credit you deserve.
