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How To Quickly Build Your Small Business Credit: 3 Proven Steps

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How to quickly build business credit

Considering borrowing capital for your small business using your personal credit? You are risking yourself! Instead, learn how to quickly build business credit.

What is business credit?

How is it different from personal credit?

Business credit is the ability of a business to qualify for financing just like personal credit do for people. Much like people, businesses can have credit profiles and reports. However, a lot of small business owners fail or ignore to build their business credit and they depend on their personal credit to access financing. There are negative consequences to such practice as there are powerful benefits for establishing credit for your business.

Why does your small business need credit?

When properly established, a line of business credit increases the credibility of your business and provides greater access to financial capital and credit. Further, this credit asset becomes particularly important at the time when you choose to sell or transfer your business.

Limit or remove personal liability

The majority of small business owners use personal credit to guarantee their business borrowing. A personal guarantee is a promise from a business owner that they are responsible for their business’s debt should the business be unable to pay the debt.
Not only does this practice undermine the corporation’s veil of limited liability – putting personal and family assets at risk – but in doing so these owners are missing an opportunity to increase the value of their businesses, sometimes by hundreds of thousands of dollars!

Another point to consider, when financed with personal credit, all business-related debt is a liability that must be settled before the business can be transferred. Additionally, other potential credit lines secured by personal credit are also lost.

Easier access to financing

Your business credit report may be used by lenders, creditors, suppliers, insurance companies and other organizations evaluating a credit or insurance application or business deal. A strong business credit score can help you secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry; which in itself will help you conserve cash flow.

Enhances liquidity

Business credit is an asset! When a business has its own line of credit, all related debt and credit become an asset that transfers with the corporation as part of the sale. This can increase the value of your business by hundreds of thousands of dollars. Potential investors usually research your company credit history as part of determining whether or not to invest in your company.

How to quickly build credit for your small business

Business credit bureaus such as Dun & Bradstreet (D&B), Experian, Creditsafe and Ansonia all keep a record of debt payments and other credit information on businesses. Information maintained on these files come from many sources. Taking steps to build your business credit begins with understanding these sources.

  • Data Furnishers (Suppliers, Creditors, Other Companies, etc.)
  • Public Records (Liens, Judgments, Bankruptcies, Incorporations, etc.)
  • UCC Filings
  • State, City, and County Business Registrations
  • Corporate Financial Reports
  • Federal Government Contracts, Grants, Loans, and Debarments
  • Internet Web Mining
  • Press Releases and News/Media Stories
  • Print Directories (Yellow Pages, etc.)
  • Self-Reported Data (Interviews and Investigations with Company Principals)
  • Dun & Bradstreet and Equifax business reports also pull from the Small Business Financial
  • Exchange (SBFE), a data warehouse that collects various points of data on your business and provides them to certified vendors.

Step by step process to build your business credit.

Now that you understand where business credit bureaus collect the information that become part of business credit profiles, it is time to explore just how you can build business credit for your small business, or any business for that matter.

Step 1: Establish your business entity.

This is a multi-step process with some steps obvious and some not so much. Just because you sold something, doesn’t necessarily mean that you are a business, at least not in the legal sense.

Register your business
In most cases, you must register your business with the state under the designated business structures available: limited liability company, partnership, corporation, sole proprietorship. Remember, you can’t effectively establish credit until you’ve established your business!

Obtain A Federal Tax Identification Number
Next step is to obtain a Federal Tax Identification Number, or EIN, which is like a Social Security number for your business.

Open a bank account
Unless your business is a sole proprietorship, you’ll need one of these to open a business bank account, which is the next mini-step. Make sure the account is in the name of the registered business name.

Get a D&B number
Similar to an EIN, a DUNS number is a nine-digit ID for your business. While your EIN is assigned to you by the Internal Revenue Service, a DUNS number must be requested from the private business credit reporting agency Dun & Bradstreet. The D-U-N-S Number can help potential partners and lenders make more informed decisions about whether or not to work with you as a client, supplier, or partner.

Step 2: Open credit accounts

Now that your business entity exists, the next step is to open credit accounts. Much like personal credit, your business credit must be made up of an assorted types of credit.

Open utility accounts in the business name
Opening accounts with utility service providers that report to the business credit bureaus is the easiest way to start building your business credit. These usually include business phone, internet, and electric. If you do a little research, you may also be able to get your rent or mortgage on your business property reported to credit bureaus too. Your company’s utilities are operational expenses that you pay for each and every month without fail anyway so why not get the most out of them as well.

A point to note here is that not all vendors and creditors report to all commercial credit agencies. You need to make sure all your utility providers are reporting your accounts to the various business credit agencies. If you are not sure, call them and request that they do.

Get a business credit card
Opening a business credit card with a creditor that reports to the major credit reporting agencies is one of the most common step to establish business credit. You definitely should have at least one open business card, but more than one can also help. Much like personal credit cards, be sure to use caution and avoid overextending your business credit card. The same rule of thumb applies here as well; ensure that you keep your usage below 30% of your limit.

Get financing terms from suppliers
The best way to build and improve your business credit is to become a good-paying client. It’s as simple as that. Unfortunately, many small business owners can’t get credit from their suppliers. They are too small or simply don’t qualify for it. However, don’t let that stop you from asking nonetheless. Many small businesses make the mistake of asking for net-30 terms immediately and giving up when the supplier says no. If the supplier is unwilling to provide net-30 terms, ask if they can provide net-5 or net-10 terms. Once the supplier approves you, pay a little early consistently. After every six months, ask the supplier to consider increasing your credit limit and net term and repeat the cycle again until you get to net 30 terms.

Get business microloans
Much like credit builder loans for personal credit, small businesses can use microloans to help build their business credit. The SBA Microloan program offers up to $50,000 worth of financing to small business owners. Unlike conventional business loans, microloans are relatively easy to get. Small business owners can get them even if their credit is not perfect. There are even microloans targeted for minority or women small business owners. Look into those as the competition is relatively lower and chances of approval are higher. Furthermore, these loans often come bundled with financial and business consulting. This benefit makes microloans a great alternative for business owners who need financial and business help growing their businesses.

Step 3: Monitor Your Business Credit

The same way you would your personal credit, you also need to monitor your business credit file or reports constantly for any errors. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the creditor and the reporting agency.

Final notes

You will need to use your personal credit to initially establish and grow your business credit through personal guarantee. For that reason, many creditors will ask you to personally guarantee credit applications. My advice is to request for this guarantee to be removed if renewing once the initial term of the account has been reached and paid in full. Also, I’d also suggest that you make sure that the term of any of the personally guaranteed credit accounts do not exceed 24 months. For reasons discussed above, it is in your best interest to separate your personal credit or liability from your business as soon as your business can qualify for credit on without any need for your personal guarantee. This usually happens within 24 months especially if you diligently follow these steps.

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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