Building Business Credit: A Simple Guide

Starting a business is a challenging task, and building business credit is essential to its success. Establishing creditworthiness for your business can help you secure financing, access better loan terms, and establish a reputation as a reliable borrower. Here are some basic steps to take to help you build business credit. For a more in-depth view, check out our free guide on building business credit at the bottom of this post.

Establish Your Business as a Legal Entity

The first step in building business credit is to establish your business as a legal entity. Incorporating your business separates your personal finances from your business finances. It allows your business to build credit on its own without affecting your personal credit score. Incorporating your business also provides personal liability protection, limiting your personal liability in the event of a lawsuit or debt.

To incorporate your business, you must file articles of incorporation with your state’s secretary of state. This process requires you to provide information about your business, such as its name, location, and the names of its owners. Once your business is incorporated, you can obtain an Employer Identification Number (EIN) from the IRS. This unique nine-digit number identifies your business for tax purposes and is necessary for opening a business bank account and building credit.

Open a Business Bank Account

Opening a business bank account is crucial to building business credit. A separate business bank account allows you to keep your personal finances separate from your business finances. It also helps you track your business’s income and expenses and manage cash flow effectively.

To open a business bank account, you will need to provide documentation, such as your articles of incorporation, business license, and EIN. You may also need to provide identification for the business owners or authorized signers.

Once you have a business bank account, make sure to keep a consistent positive balance. Banks and lenders may view a positive balance as a sign of financial stability and creditworthiness.

Use Credit Responsibly

Using credit responsibly is essential to building business credit. A good credit history shows that your business is financially responsible and can pay its debts on time.

One way to establish credit is to obtain a business credit card. Use the card to make purchases and pay bills, but make sure to pay off the balance each month to avoid high-interest rates and to improve your credit score.

Another way to build credit is to apply for a business loan. Applying for a loan and paying it off on time can help establish your business’s creditworthiness. Establishing trade lines (think Net 30) will also help showcase responsible use of credit.

Make sure to pay all your bills on time to establish a good payment history. Late payments can negatively impact your credit score and make it harder to obtain credit in the future.

Monitor your credit report regularly to ensure that it is accurate and to identify any errors or issues that need to be addressed. There are several credit reporting agencies that provide credit reports for businesses, such as Dun & Bradstreet, Experian, and Equifax.

Conclusion

Building business credit takes time and effort, but it is essential to your business’s success. By establishing your business as a legal entity, opening a business bank account, and using credit responsibly, you can establish creditworthiness for your business. Remember to pay your bills on time and monitor your credit report regularly. Building good credit takes time, but it is worth the effort. With good credit, your business can access financing, get better loan terms, and establish a reputation as a reliable borrower.

For a better overview and actionable steps you can take to start building your business credit, you can download our FREE guide on how to build and boost your business credit: here