Establish Your Business Credit – Here’s Why

Whether you have a new small business, or you are now involved because you bought one or have suddenly become an owner or a manager here are 7 reasons why you should establish your business credit.

Establish Your Business Credit to: 1. Separate Your Business Credit From Your Personal

Even if you are a sole proprietor (let’s say you sell something handcrafted by no one but you), it will still pay off, big time, for you to erect a financial barrier between your personal credit and your business credit.

Why? Because keeping a barrier means that your personal credit will not be affected by your business credit. You don’t stand to lose a car, for example, in the event that your small business goes into receivership.

Establish Your Business Credit to:  2. Save Your Personal Credit For Your Personal Expenses

Even if you pay all of your small business’s bills on time, every single time, you aren’t doing yourself any favors by using your personal credit cards (or other accounts such as a checking or savings account) to pay off business debt.

Why? Because both forms of credit scores are affected by what’s called the Credit Utilization Rate. This is just a simple calculation of the credit you’re using, divided by your total available credit. You want to keep this ratio at about 30% or less.

Therefore, if you are using your personal cards to pay for your business expenses, you are raising your credit utilization rate. If you bring it above the 30% mark, then your personal credit score will be adversely affected even if you are diligent about paying off your business debts.

Establish Your Business Credit to: 3. Establish a Credit History Before You Really Need to Tap It

For the big credit reporting bureaus (Experian, Equifax, and Dun and Bradstreet; you know, all the places you know of where to check a business credit score), credit history is one of the components they use when calculating your business credit score.

The longer (and better) your credit history, the better your small business’s credit score is going to be. When you consider what credit score needed for a business loan, then you need every bit of your credit score you can get. If you start early, it can only help you.

Establish Your Business Credit to: 4. Prepare For Lean Times

You may not want to think about it, but there are going to be times when the work dries up. If you are in a seasonal business, then this is a part of the DNA of your company. But every business can go through leaner times.

If you have to make payroll or equipment payments, or just cover the rent, you are going to need business credit in order to get by. And by establishing your business credit before you actually need it, you are far more likely to get better terms – or even credit at all.

Establish Your Business Credit to: 5. Act Like a Business, Just Like The IRS Says You Are

What does this mean? If you have been responsible and set up your business with an EIN (employer identification number), then at some point in the process you had to declare to the Internal Revenue Service that your small business is, indeed, an actual business and not just a hobby or the like.

As a result, the IRS is already treating you and your small business separately when it comes to tax liability. Therefore, if you’re still floating interest-free loans to your business with your personal credit cards, then now is the time to cut that out.

Establish Your Business Credit to: 6. The Vendor Credit Tier is a Wonderful Thing and You Should Use It

What is the vendor credit tier? These are trade lines that report.

These sorts of accounts tend to be for the things bought all the time, like marketing materials, shipping boxes, outdoor work wear, ink and toner, and office furniture.

But first off, what is trade credit? These trade lines are credit issuers who will give you preliminary credit when you have none now. Terms are oftentimes Net 30, versus revolving.

So, if you get an approval for $1,000 in vendor credit and use all of it, you will need to pay that money back in a set term, like within 30 days on a Net 30 account.

Establish Your Business Credit to: 7. Eventually Get Bank Loans For Your Company

Sometimes, a business opportunity is just too good to pass up, and you need to act quickly. This can be anything from getting real estate at auction to buying out the equipment owned by a company going through reorganization, to bidding on raw materials when they are at their best price for the year.

But you may not have that kind of cash on hand. Establishing business credit means that bank loans will be granted more quickly and with better terms. You will be able to take advantage of these opportunities, and seize them when they are still meaningful.

Without business credit, even if you get a loan, it will inevitably take longer – and someone else might snap up those inexpensive raw materials or outbid you on that prime real estate.

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN.

Establish Your Business Credit – Here’s How

Performing the steps out of order will result in repetitive rejections. No one can start at the top with company credit. For example, you can’t start with retail or cash credit from your bank. If you do, you’ll get a denial 100% of the time.

Small Business Fundability

A small business needs to be fundable to credit issuers and vendors.

That’s why, a small business will need a professional-looking web site and e-mail address. And it needs to have website hosting bought from a merchant such as GoDaddy.

Also, business telephone and fax numbers ought to have a listing on ListYourself.net.

Also, the business phone number should be toll-free (800 exchange or the equivalent).

A company will also need a bank account devoted only to it, and it must have all of the licenses essential for operation.

Licenses

These licenses all must be in the accurate, correct name of the small business. And they need to have the same business address and phone numbers.

So keep in mind, that this means not just state licenses, but possibly also city licenses.

Dealing with the Internal Revenue Service

Visit the IRS website and get an EIN for the business.

Sole Proprietors Take Note

If you operate a small business as a sole proprietor, then at the very least be sure to file for a DBA. This is ‘doing business as’ status.

If you do not, then your personal name is the same as the small business name. Consequently, you can find yourself being directly accountable for all business financial obligations.

And also, per the IRS, with this arrangement there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 probability for corporations! Steer clear of confusion and significantly lower the chances of an Internal Revenue Service audit simultaneously.

Starting the Business Credit Reporting Process

Start at the D&B web site and get a cost-free D-U-N-S number. A D-U-N-S number is how D&B gets a company in their system, to produce a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.

Once in D&B’s system, search Equifax and Experian’s sites for the small business. You can do this at fastcs.wpengine.com/reports. If there is a record with them, check it for correctness and completeness. If there are no records with them, go to the next step in the process.

By doing this, Experian and Equifax will have activity to report on.

Vendor Credit Tier

Start with the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score.

Vendor Credit Tier – It Makes Sense

Not every vendor can help in the same way true starter credit can. These are merchants that will grant an approval with marginal effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian. This is the best way to start to establish your business credit.

You want 5 to 8 of these to move onto the next step, which is the retail credit tier. But you may need to apply more than once to these vendors. So, this is to confirm you are responsible and will pay timely. Here are some stellar choices from us: https://oldcs.creditsuite.com/blog/5-vendor-accounts-that-build-your-business-credit/

Retail Credit Tier

Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, then move to the retail credit tier. These are businesses which include Office Depot and Staples.

Just use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, use the business’s EIN on these credit applications.

One good example is Lowe’s. They report to D&B, Equifax and Business Experian. They want to see a D-U-N-S and a PAYDEX score of 78 or better.

Fleet Credit Tier

Are there 8 to 10 accounts reporting? Then move onto the fleet credit tier. These are service providers like BP and Conoco. Use this credit to buy fuel, and to fix, and take care of vehicles. Just use your Social Security Number and date of birth on these applications for verification purposes. For credit checks and guarantees, make certain to apply using the small business’s EIN.

One such example is Shell. They report to D&B and Business Experian. They need to see a PAYDEX Score of 78 or higher and a 411 small business phone listing.

Shell might claim they want a certain amount of time in business or profits. But if you already have enough vendor accounts, that won’t be necessary. And you can still get approval.

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN.

Cash Credit Tier

Have you been responsibly managing the credit you’ve gotten up to this point? Then move onto the cash credit tier. These are companies like Visa and MasterCard. Only use your Social Security Number and date of birth on these applications for verification purposes. For credit checks and guarantees, use your EIN instead.

One example is the Fuelman MasterCard. They report to D&B and Equifax Business. They need to see a PAYDEX Score of 78 or higher. And they also want you to have 10 trade lines reporting on your D&B report.

Plus, they want to see a $10,000 high credit limit reporting on your D&B report (other account reporting).

Plus, they want you to have an established company.

These are businesses such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are normally MasterCard credit cards. If you have 14 trade accounts reporting, then these are doable.

Monitor Your Business Credit

Know what is happening with your credit. Make certain it is being reported and deal with any inaccuracies ASAP. Get in the practice of checking credit reports and digging into the particulars, and not just the scores.

We can help you monitor business credit at Experian and D&B for only $24/month. See: fastcs.wpengine.com/monitoring.

At Equifax, you can monitor your account at: www.equifax.com/business/business-credit-monitor-small-business. Equifax costs about $19.99.

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN.

 Update Your Records

Update the details if there are inaccuracies or the data is incomplete.

Fix Your Business Credit

So, what’s all this monitoring for? It’s to contest any problems in your records. Mistakes in your credit report(s) can be taken care of. But the CRAs usually want you to dispute in a particular way.

Disputes

Disputing credit report errors normally means you send a paper letter with duplicates of any evidence of payment with it. These are documents like receipts and cancelled checks. Never send the originals. Always mail copies and retain the originals.

Fixing credit report mistakes also means you specifically itemize any charges you dispute. Make your dispute letter as crystal clear as possible. Be specific about the problems with your report. Use certified mail so that you will have proof that you mailed in your dispute.

A Word about When You Establish Your Business Credit

Always use credit smartly! Don’t borrow more than what you can pay back. Track balances and deadlines for repayments. Paying off in a timely manner and in full will do more to boost business credit scores than almost anything else.

Establishing business credit pays. Good business credit scores help a small business get loans. Your lender knows the business can pay its financial obligations. They know the company is for real.

The business’s EIN links to high scores and loan providers won’t feel the need to request a personal guarantee.

Takeaways

Business credit is an asset which can help your small business for years to come. Learn more here and get started toward building business credit.