How to establish, manage and use credit for your business needs.
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To dive into business credit, we need to understand personal credit. So, here is a quick overview. You borrow money through a loan or a credit card, you buy the things you want and/or need, then you pay that money back. Assuming you aren’t overspending and in debt, your credit score increases. Simple enough. Business credit works the same way, but instead of building your financial reputation you are working on the financial integrity of your business. Here are five simple steps to building business credit.
Step #1 – Establish Your Business
In order to get business credit, you must have a legal business. So, let’s set one up!
- Incorporate or form an LLC (Limited Liability Company). This will help ensure your company is seen as a separate business entity.
- Obtain a federal Employer Identification Number. This starts the process of building credit because now your financial history can be tracked.
- Open a checking and savings account in your legal business name. This is to separate your personal finances from your business, which comes in handy when you go to secure a business loan.
- Set up a dedicated business phone line in your business name, and make sure it’s listed.
Follow these steps and your business will be legally established. Once it is, be sure to check to see if you have a D-U-N-S number. This is to make sure that Duns & Bradstreet, one of the largest credit bureaus, has your business on file. Most lenders will reference this when it comes time to review your business for loan approvals.
Step #2 – Don’t Mix Business with Personal
Generally, this saying is used as advice on workplace relationships, but it also applies to credit. You see, mixing the two can quickly turn into a couple of different problems.
First off, it can be a tax nightmare! When you mix your personal and business accounts, it isn’t always easy to determine which expenses belong to you and which belong to your company. Personal receipts on the business card… Business receipts on the personal card… Did you make sure you found every last expense and how will you organize all of this in case you are audited? This is not to mention that the likelihood of being audited may increase.
Secondly, if you mix up your personal and business accounts, then there won’t be clear distinction of what is personal money and what is business money. This becomes a problem if a person or entity is looking for repayment on a business-related issue, such as a lawsuit or an unpaid loan, because they can go after your personal finances, if the distinction hasn’t been made.
Step #3 – Create a business financial profile
A quick way to start this process is to look to vendors that your business already works with and open a line of credit with them. Most office and hardware supply stores have a way for your business to get a small amount of credit for purchases that is not tied to you personally, so take advantage of it. But, before you do, verify that the creditor will send your payment history to the credit bureaus because this is something that is done voluntarily. If your history isn’t recorded with the bureaus, then your credit isn’t being built. Once you have established a handful of these accounts, your business will have a credit profile for lenders to review for creditworthiness. Other great resources for building credit are the utilities and business phone accounts. As you pay these types of “expense of service” bills on time, the business’s credit will continue to improve.
Step #4a – Apply for a business credit card
Now that your business has established a financial profile, you can apply for a business credit card. This is where personal credit is important because even though the creditor needs to see the business’s EIN, the company still needs a human representative on the account. Business credit cards are a really good option because of the different perks that they offer your business, which include a higher credit limit, better rewards, and increased financial flexibility.
Step #4b – Apply for a business loan
Remember that savings account you opened for your business when you were establishing your business? Well, this is where it comes in handy. You can use the savings account to secure a small loan. Your bank wouldn’t have any reason to object and this would improve your business’s credit greatly because you are borrowing from a bank.
Step #5 – REPAY your credit debts
This really should go without saying, but pay your bills on time! Unlike personal credit, business credit can be penalized even if you are a day late. In fact, if you truly want the best business credit scores, creditors would like to see you pay your bill early and in full. This step is truly the key when it comes to credit management and use. You should be spending business money wisely because, at the end of the day, that money needs to be repaid.
Before jumping into a business head first, it would be wise to speak to a business planner or banker. They will help you step-by-step through this process and ensure you are on the right track for success. There are also many different business accounts, loans and credit cards for you to consider, so having a professional on your side is invaluable.