Some small business owners are surprised to learn that when they start a new business, not only does their business have “no” credit, but that no business credit also means “low” credit. Unfortunately, having no business credit translates unfavorably to banks from whom you may be seeking to borrow funds. In a bank’s eyes, having no business credit means you’re an unproven entity. But there are several easy steps you can take—even on day one of your business—to get your business credit established and start to see it grow.
1. Understand the Importance of a Business Credit Score
The purpose of a business credit score is to indicate how likely your business is to repay debt. In a nutshell, this score represents the past credit transactions your business has been involved in. While it may sound similar to your personal credit score, the two numbers are calculated very differently. Vendors and suppliers look at your business credit score to evaluate whether or not they want to extend your business a line of credit. As these institutions are doing business with another business, they put more emphasis on your business credit score than on your personal credit. The same is true when applying for a business credit card or a loan.
The size of your business is also a substantial factor. If you have fewer than 25 employees, your personal credit score as the business owner will be a higher factor than it would for a larger business.
2. Get Recognized by the Business Credit Bureaus
Your personal credit score starts building as soon as you start making credit transactions. But with business credit, the process is not quite as simple. As a sole proprietor, for example, you won’t be eligible for business credit. In order to qualify for business credit, you need to set up a legal business entity, such as a C Corporation, S Corporation or LLC. Work with your business lawyer or accountant to determine which structure is best for you.
Next, your business needs an EIN, or Employer Identification Number. Also known as your federal tax ID number, this is the identifier that business credit bureaus will use to track your business’s credit transactions. You can apply online for an EIN through the IRS website.
The three main business credit bureaus—Experian, Equifax and Dun & Bradstreet—recommend that you open a business bank account and set up a dedicated phone line registered under your business name to help creditors validate your business information.
Be aware that Experian and Equifax will recognize you the first time trades are reported to them. However, Dun & Bradstreet will not. Instead, D&B will give your business its very own “DUNS number.” Many credit applications will ask specifically for that number, which you can obtain directly from Dun & Bradstreet for free within the standard of 30 days, or faster using their expedited service.
3. Get (and Use) a Business Credit Card
After setting up your business as an S-corp, C-corp or LLC, get a business credit card. You’ll want to make regular transactions and pay them off on time, which will help to improve your business credit score. At a minimum, even with no or low credit, you can get a secured credit card to help you get established. A secured business credit card is one in which you pay a deposit and make transactions against the deposit amount. It works like a pre-paid card or debit card and is available to businesses with virtually any level of credit.
When you’re ready or you qualify, you may move up to an unsecured card, which works more like a traditional business credit card. But simply having one is not enough. You must use your business credit card consistently and responsibly to build your business credit.
4. Develop Meticulous Finance Habits
One of the common challenges small businesses face is the occasional need to access additional cash. Whether you face a large seasonal order or a slow-paying customer that puts a crimp in your cash flow, these short-term challenges are all too common for business owners.
To put yourself in the best possible position for future borrowing, it is essential that you establish business credit quickly. But you also want to be consistent and meticulous to ensure that your credit builds into an asset and not a hindrance to your future business growth. The good news: it doesn’t take much to do this. A little will go a long way, such as the basics of paying on time and in full, and not over-relying on credit.
Time and attention to building your business credit score will pay off in a big way, giving you more options for growing your business in the months and years to come.