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The Complete Guide to Business Credit
October 30, 2019
Guide to Business Credit: Cropped shot of handsome young man using a credit card and cellphone while working from home

The Complete Guide to Business Credit

The idea of business credit may seem confusing to small business owners. To put it into a few short words: business credit works much like personal credit, but focused on your business.

If you’re aware of how personal credit scores and credit reports work, this guide will provide a strong look at the inner workings of the machine that is business credit, business credit reporting, and the business credit score process.

However, there are numerous components that work in tandem with the overall concept. Business credit is a complicated process, but if you know how to establish your business, maintain credit relationships, and correctly build credit accounts, you’ll be far better equipped to navigate the world of small business profitability.

In a sink-or-swim environment where competition is fierce and one wrong move can tank a small business, ensuring your lifeblood is secure if and when financing is required is one of the most crucial steps that’s often put on the backburner. 

Credit isn’t scary. And establishing and building business credit isn’t the monster under the bed. But it is incredibly important to the security of your small business’ longevity. Here’s why.

Why is Building Business Credit Important?

Building your business credit has a direct effect on the growth of your business, no matter how large or small it may be. Many investors, banks, and lenders, including Fora Financial, rely on the creditworthiness of your business when determining terms of a loan, premiums on insurance, line of credit increases, or determining partnership opportunities.

Per a study by the Small Business Association (SBA), over a quarter of small business owners are unable to obtain the funds needed to maintain profitability and viability in their company. In fact, the SBA has stated that delayed or insufficient financing is one of the most common reasons that businesses fail.

As your business credit history and score is public information, it’s crucial to build, establish, and maintain business credit from day one. This assists in obtaining stronger APRs on business loans, terms of those loans, availability of business credit cards, improved lines of credit, and leverage of negotiations on supplier and vendor payment terms. 

Keep Your Finances Separated 

For small business owners, the separation of business credit from personal credit is another very important piece of the puzzle. 

Business credit can be thought of as a steel-reinforced dam. On one side is the persistent river flow of business decision making and financial dependencies, and the other is the quieter lake of your personal credit history, which typically moves and updates far slower.

Note: Your personal credit history is linked to your social security number, and your business credit history is linked to your employer identification number. 

The Steps to Establishing Business Credit

Establishing business credit isn’t something that happens overnight. Remember, it takes years to build your personal credit. Business credit is an even more complicated and intensive machine, so establishing and maintaining business credit is a marathon, not a sprint. Below are eight steps on how to establish business credit in an effective, well-thought-out manner.

Make Your Business Known

Sure, you may be in the process of starting your business. Or maybe you’ve already opened up a shop. Regardless, this doesn’t mean that you are a well-known entity. It’s important to remember that business credit cannot be built until your business has been established.

How do you do this? One of the most strategic methods to make your business known to a local audience is to set up a. Google My Business listing, which can be considered the modern-day Yellow Pages.

The basics of a Google Business listing is the NAP: Name, Address, and Phone Number. If you don’t have a business phone number, get one. Google Voice works well in a pinch and can route directly to your existing cell phone.

If you don’t have a physical address outside your home, a temporary fix is a virtual office. These typically will cost between $75 and $200 per month and include mail pick-up, call answering, and use of conference space. The two largest providers of virtual office space are Regus and DaVinci Virtual.

Equally important is obtaining a business bank account. This needs to be opened in the official name of your small business. Utilize this account to pay company-side bills and invoices.

Build Credit-Based Relationships with Third Parties

In the wild and wonderful world of small business growth, solid credit lines with supplier and vendor third parties are crucial. The stronger the third party relationship, the greater the likelihood that you can avoid upfront payments in full for services rendered.

Securing lines of credit or payment terms like net-30 or net-15 with a couple of vendors reporting their payments to the big business credit reporting agencies assist you in establishing a high-quality business credit history.

Keep in mind, suppliers and vendors are in no way required to report lines of credit to business credit bureaus. For this reason, it may be necessary to do your due diligence, focusing on opening lines of credit with vendors who do proactively report. Three examples of companies who report lines of credit to report agencies such as Dun & Bradstreet include Grainger (net-30), Staples (net-30) and BP Gas (net-14).

Grab Your Employer Identification Number

Employer Identification Numbers (EINs) act like Social Security Numbers for your small business. An EIN is required to incorporate in the United States, regardless of company type. In addition, you’ll likely to need an EIN to open bank accounts under your business name, or to secure contracts with other entities.

How EIN’s and SSN’s Differ

An SSN is a nine-digit number (xxx-xxx-xxxx) that belongs to a U.S. citizen or authorized resident. Individuals who are employed and receiving wages are typically required to have a Social Security Number or apply for one. They are issued by the Social Security Administration

Like an SSN, an EIN is a nine-digit number (xx-xxxxxxx). However, each business that pays its employees or files tax returns for their business is required to register for and obtain an Employer Identification Number. These are issued by the Internal Revenue Service. More information can be found in IRS Publication 1635.

Make the Choice to Incorporate

If you have yet to make the choice to do so, you need to consider incorporating your small business. Adding an “Incorporated” or an “LLC” to the end of your business name will allow you to separate your business and personal assets separate in the legal sense. 

Choosing to not incorporate will connect your credit history between your business and your personal assets.

Business Credit Card - Beautiful young female shopper holding a credit card - focus on foreground.

The Different Types of Businesses

  • A sole proprietorship is owned by one person, and there’s no financial or legal distinction between the business owner and the business.
  • A partnership is registered for purposes of the IRS. In this, financial, business and legal responsibility is equally divided between two business owners.
  • A limited partnership is an ideal option for those looking to raise money from investors and outside sources unaffiliated with day-to-day operations.
  • Corporations are independent, with multiple shareholders. This is the most appropriate business type for companies that are already established.
  • The LLC is the most common business type for small businesses. With less regulation and no personal property at risk, this blend of a partnership and corporation is ideal formost smaller enterprises.
  • In a Nonprofit, the earnings pay for the company’s expenses. A bonus of nonprofits is their ability to apply for a “tax exempt” status. 
  • Co-ops exist when earnings are divided among members. In a Co-op, there are no external stakeholders, and members utilize the services of the business.

Choose The Right Business Credit Card

Opening business credit cards with companies that report information to the major business credit reporting agencies can be a great way to establish business credit. It’s vital to have at least one open business credit card, however having more than one can be beneficial.

However, it’s crucial to exercise caution. Avoid overextensions on your business financial situation. Just like with personal credit, just because credit availability exists, it doesn’t mean it needs to be used up. 

Pay Off Your Debts Every Time

The Golden Rule of any credit type situation, both business and personal, is to pay your bills on time. Paying credit bills in a timely fashion works to show that you’re a reliable credit owner with the ability to efficiently pay off and manage debt that’s incurred. 

Late payment issues, especially those that are incredibly delinquent or sitting in collections, have a detrimental effect on business credit scores. They can also cause negative impacts on business credit profiles.

Ensure Business and Personal Expenses Are Split

If there’s one thing that you take away from this extensive guide, it is that you need to keep your business expenses and personal expenses separate. 

Through opening lines of credit, credit cards and accounts at banks in the legal name of your business, you’ll be properly separating business and personal expenses. A clear separation also helps to make filing and navigating the world of business taxes far simpler and less of a hassle.

Keep A Watchful Eye on Credit Reporting

Credit reporting is the heartbeat of business credit. A quarter of all small business owners have reported errors when checking their business credit reports. Monitoring your business credit history will assist you in spotting inaccuracies. 

If you discover errors, it’s possible to file disputes with the individual reporting agency from which the inaccuracy came from.

Per Credit Karma, the top three business credit bureaus are:

  • Dun & Bradstreet
  • Equifax Small Business
  • Experian Business

The Best Methods to Build Business Credit

Building business credit isn’t difficult. If you follow the tips above to establish business credit, and the two crucial methods below to ensure your credit can be built, you’ll be properly positioned for business success.

One of the strongest benefits of building business credit is the eligibility for stronger payment terms with vendors and the ability to receive lower rates on small business financing. Both assist with the management of cash flow, which is crucial to small business success.

Business credit cards work wonderfully with the management of cash flow. These cards offer quick, flexible financing at interest rates competitive with other funding options like merchant cash advantages. 

However, the strongest option for financing your company is small business financing through companies such as Fora Financial. Regardless of the financing option you select, the product should ensure that overall costs (which includes paid interest) result in profitability for your business in the long run.

The grace period with credit cards and small business lending allow you and your company to avoid potential interest charges if things get tight unexpectedly. Conversely, lines of credit with third party vendors sometimes begin to accrue interest immediately.

Remember, Pay On Time, Every Time

The most important step that needs to be taken to build your established business credit is to ensure you pay your bills on time, every single time. Above, we mentioned that it’s crucial to pay your debts in a timely fashion, in an effort to not only build credit, but also to ensure that interest isn’t accrued, which negatively affects your business’ bottom line.

However, it should be noted that there are additional advantages to paying all of your bills on time. With some business credit reporting agencies, a small business can effectively obtain enhanced credit ratings by paying off debts before due dates arrive.

Remember, payment-related information that appears on business credit reports is often more of a deep dive when compared to the shorter personal credit reports from Experian, Equifax, and TransUnion. If you pay your bills as soon as possible, your business credit score will likely increase faster than just-in-time payments, and far quicker than late payments.

Finding yourself late on a loan payment? Don’t fret. Read this guide for the steps you should take for damage control.

Don’t Forget to Check Your Business Credit Score

The second most important step to build upon established business credit is to ensure that your credit reports and business credit score is checked routinely. This will help you monitor the progression of your business credit building.

In addition, keep in mind that improvements in your personal credit score can impact your business credit score, even if your method of incorporation keep things completely separate.

It’s also important to not put all faith and trust into one business credit score. One third party vendor may report credit-based relationships to Experian (which affects your Intelliscore), but doesn’t report to D&B (Dun & Bradstreet).

For this reason, it is important to aggregate. Check scored and business reporting with multiple business credit reporting agencies to discover if these accounts are assisting in growing and building your business credit scores and ratings.

For more information, check out our article How to Maintain a Good Credit Score.

Business Credit Is Not The Monster Under The Bed

The world of business credit is nothing to fear. It’s easy to navigate if you remember to apply the tips in this guide to your new or existing small business. From vendors and suppliers to business credit card selection, to small business financing and beyond, credit is less of a burden and more of a tool that you can use to improve your company.

Have questions? Feel free to drop us a line. Our team of business financing experts would be more than happy to discuss financing options with you!

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].