Business credit is something that every business owner should care about. Business credit is simply a financial profile of a business based on its financial history. It is determined by how a company handles its loans, credit cards, trade lines, and lines of credit and it is tied to the business’s Employer Identification Number (in contrast to an individual’s credit score which is tied to his/her social security number.)
Why is Business Credit Important?
Business credit is important because it allows a company to use its own information to qualify for loans instead of using an individual’s credit score, thus protecting an individual from liability. Building business credit increases a business’s ability to access financing by qualifying for loans, lines of credit, and credit cards. Additionally, with a good score, lenders are encouraged to offer better loan terms including lower interest rates and higher borrowing levels. Good scores can help increase trust and improve relationships with vendors and suppliers, and even gain new business. Plus, a good score can improve the confidence of employees and other stakeholders.
How Long Does It Take to Build?
Some experts suggest that it takes three years to build satisfactory credit for your business. However, some lenders may require only one year of a business’s operating tenure. Generally, lenders want to make sure that your business has no judgments against it, and that your business will be around to pay off the loan or line of credit. Within a three-year period, all the financial activities that are linked to a company will be part of its credit history, including its bank account, credit card use, supplier payment history, etc., as reported to the business credit reporting agencies, Equifax, Experian, and Dun & Bradstreet. For a new business, it is important to start building your business’s credit immediately so that you will be around and viable in three years.
How to Establish and Build Credit for Your Business
- Pick the most appropriate business structure and incorporate your business. The structures to consider primarily are a limited liability company (LLC), a limited liability partnership (LLP), an S-corporation (S-corp,) and a C-corporation (C-corp.) Don’t choose a sole proprietorship or a partnership because those won’t separate you individually from the business. Then register your business with the state.
- Apply for an Employer Identification Number (EIN) that the IRS will use for identification purposes.
- Get a Dun & Bradstreet (D&B) number for your business to open a credit file.
- Get a dedicated business bank checking account and build a relationship with that bank. Maintain a positive account balance.
- Get a credit card for your business. Look for a card that has attractive features including cash back.
- Establish credit lines with your vendors and build solid relationships with each vendor. Use vendors (and other accounts) that report to the right agencies.
- Make all bill payments on time.
- Utilize credit cards and lines of credit to build it up rapidly.
- Frequently check your business’s credit report to ensure that there are no errors and promptly report any errors to the credit bureaus.
Choose An Expert Accounting and Bookkeeping Company
Contact Doerhoff & Associates CPA, Based in Jefferson City, MO. Our goal is to provide what the small business owner needs to run a business successfully. We can service your unique set of needs for accounting services including pre-packaged service suites and customized services so you can grow.