How to Build Good Business Credit

When it comes to the importance of building good business credit, it can be helpful to think of that family member who is always asking for money. There’s at least one in every family. The problem is the one who’s always asking to “borrow” money, is the one who is least likely to be able to pay it back. You’ve given them money before, and they never paid you back. You know if you gave them money again, you’d never see that money either. The family members who never ask to borrow money make sure never to put themselves in that position. But if something happened and they did need to borrow money, you’d give it to them if you had it because you would know they would pay you back.

Businesses work on a similar principle. Lenders and vendors want to make sure they
get a return on their investment, which means they only want to loan to people (and
other businesses) who will be likely to pay them back.

To ensure a business is a good investment, they’ll check the business’ credit score, just
like a bank or lender would check your personal credit score before issuing you a
personal credit card, a car loan, or a mortgage for a house.

That leaves the question: How can you ensure your business has good credit?
The answer is by doing a lot of the things you would do to build your personal credit, but
there are a few additional steps you need to take.

Register Your Business

The first step in building good business credit is to separate your business finances
from your personal finances. This means you need to:

a. Open a bank account for your business that is separate from your personal bank account

b. Register your business as either an LLC or using another structure for your business

c. Apply for an Employer Identification Number (EIN) with the IRS. This is your company’s tax ID. You’ll need it, not just to pay taxes, but to apply for lines of credit on behalf of your business. You can think of it as a Social Security Number for your business.

Get a DUNS Number

Dun & Bradstreet is one of three main business credit bureaus. The other two are
Equifax and Experian, but they both track your company’s credit score automatically
based on information provided to them by lenders, as well as public records, such as
court filings.

Dun & Bradstreet is the only business credit bureau you have to actively set up an
account with, which you can do for free on their website. Once you’ve set up your
account, you’ll get a DUNS number, which lenders and creditors will look up before
offering your company a loan to determine the financial health of your business.

Build Good Credit-Building Habits

Once you have your business set up and registered with all the relevant entities, it’s up
to you to prove to them that your business pays its debts. You can do this by doing all
the same things you would do to build good personal credit, including:

d. Applying for a credit card for your business
e. Paying off the balance of your credit card every month
f. Not spending more than 30% of your line of credit
g. Paying all your creditors on time
h. Avoiding judgments, liens and bankruptcy
i. Making sure your information is up to date with all three business credit bureaus

Maintaining a high personal credit score will also help your business, especially in the
early days when you’re still building business credit. For example, you can sometimes
use your personal credit score to apply for a business credit card with better terms,
especially when you’re still in the process of setting up your company and building credit
for your business.

Establish Trade Lines

Some suppliers offer trade credit, which means they give you the good or service before
you pay for it. You then have a certain number of days or weeks after you’ve received
them to pay your bill.

This will help you build good business credit, especially if the vendor reports payments
to a business credit bureau. If they don’t, you can list them as a trade reference on your
Dun & Bradstreet account, at which point Dun & Bradstreet will follow up to collect your
trade data and apply it to your credit score.

No one wants to be the person no one wants to lend money to. Not only does it feel
less-than-great to be in that position, but we all know it means we’re less likely to get
the money we need.

When it comes to building your business credit, you need a strong grasp of your
financial situation, which means understanding where your money is coming from and
where it’s going.

A good bookkeeper doesn’t just record your business transactions, we can also ring the
alarm when something doesn’t look right, and help identify more and better opportunities for growing your business, including helping you apply for lines of credit for your company.

If you need a bookkeeper to help you make the most of your company’s hard-earned
money, just fill out this form to start the process of determining whether it makes sense
for us to work together.