How to Build Business Credit

Establishing business credit is an integral aspect of enhancing your company's financial prospects. Regardless of whether you operate as a limited liability company or a corporation, it is essential to create a distinct credit profile for your business, separate from your personal identity.

When you officially register your business, whether it is an LLC, LLP, or corporation, it gains recognition as an independent legal entity capable of entering into contractual agreements. Consequently, it is treated as a separate entity from yourself as an individual.

However, if you conduct business as a sole proprietorship, it is crucial to comprehend that there is no legal or financial distinction between you and your business. In such cases, any credit you acquire or funding you seek will be exclusively linked to your personal identity and reflected in your personal credit reports.

To maintain a clear separation between your business and personal finances, the initial step is to begin building credit in the name of your company. If you desire to expedite the process of establishing business credit, here are five straightforward measures to consider:

Step 1: Opt for the Ideal Business Structure 

The initial step in establishing your business as a distinct legal entity involves carefully selecting a suitable business structure, such as an LLC, LLP, or corporation. Keep in mind that sole proprietorships do not create a separate business entity.

Once you have determined the appropriate structure for your business, the next course of action is to register it. The specific registration process will depend on the chosen structure and the location of your business.

For valuable assistance in choosing the optimal structure for your company and guidance on the registration process, refer to the Business Guide provided by the Small Business Administration (SBA).

Step 2: Acquire a Federal Tax ID Number (EIN) 

To facilitate various aspects of your business operations, including filing tax returns, opening a business bank account, applying for licenses and permits, and seeking business credit, it is essential to obtain a federal tax ID number, also known as an Employer Identification Number (EIN). You can easily apply for an EIN at no cost using the IRS assistance tool. This unique nine-digit number will be assigned to your company.

Step 3: Establish a Dedicated Business Bank Account 

After obtaining your federal tax ID number, it is imperative to open a business bank account exclusively for your company. This step is crucial for maintaining a clear demarcation between your business and personal expenses.

The quality of your banking relationships holds significant weight in determining your company's funding potential. In addition to serving as a reference on credit applications, your business bank account provides crucial data that lenders utilize during the funding evaluation process.

Step 4: Foster Credit Relationships with Reporting vendors and suppliers. 

One of the most straightforward approaches to building business credit is to establish credit relationships with vendors and suppliers who report credit information. By making purchases and payments on credit for supplies, inventory, or other materials, you contribute to the generation of your company's credit profile and business credit report, as these activities are reported to business credit reporting agencies.

As your company accumulates several reported trade lines, a business credit rating or score is established. Remember to select vendors and suppliers that report to business credit reporting agencies, as each relationship also serves as a valuable trade reference for future credit applications.

Step 5: Regularly Monitor Your Business Credit Reports 

Given that there are three major business credit reporting agencies, it is crucial to monitor the credit files of your company maintained by each agency. Each agency gathers data from different sources, and as a result, there may be variations in the information they possess about your company.

The good news is that each business credit agency offers mechanisms for updating basic information regarding your business. If you come across any outdated or incorrect information, promptly contact the respective agency to initiate the necessary corrections.

By establishing a robust business credit report, you increase your chances of obtaining higher credit approvals, benefiting from better interest rates, and securing favorable repayment terms for loans and lines of credit.

Additionally, it is equally important to diversify your business credit portfolio by including other types of business credit, such as a business credit card or a line of credit. Let these five straightforward steps serve as a solid starting point for building business credit for your company.