Everyone knows how important it is to have strong personal credit, and you’ve probably worked all your life building up a great credit score. But if you’re starting a small start-up, you need to build a whole other credit score that will benefit you as a business owner. Knowing how to raise your business credit is a science that you can easily learn. Below are tried and tested methods on how to jump-start your small business and its credit.
What Is Business Credit and How Is It Different Than Personal Credit?
Your personal credit rating means you’re reliable. Likewise, business credit means you’re a well-established business that a lender can trust. Your score is determined by three main business credit reporting agencies: Dun & Bradstreet, Experian, and Equifax. These agencies collect information from vendors and creditors you work with, and each agency calculates your score differently. So always update your information with each agency. Your score with personal credit ranges from 300-850; however, business scores range from 1-100. The higher the score, the more trustworthy you are as a business.
In order to get stellar credit, you need to follow these simple steps below:
Establish a Business Entity
First things first, you need to incorporate your business so you won’t involve your personal credit score. You can do that by choosing business structures that are either C Corporation, S Corporation, or Limited Liability Company (LLC). Getting a C Corporation is ideal if you’re planning to release stock or go public; it also separates your legal and financial issues. However, many small businesses opt for an S Corporation because you get taxed individually, instead of the double-tax that comes with a C Corp. Meanwhile, an LLC is less expensive and easier to get as it has liability protection.
Obtain a Federal Tax Identification Number
The IRS will require some businesses to get an Employer Identification Number (EIN) for tracking purposes. An EIN is basically the business’ social security number. However, LLCs don’t need one as you can depend on the business owner’s personal social security. It only takes a few minutes to apply for it online and it’s highly necessary.
Open a Business Account
Keep your personal and business finances completely separate; this will allow business credit bureaus to see your financial transactions. It will also create better credit for you within the three credit reporting agencies as well as show your vendors that your finances are done professionally and legally through business credit cards.
Get a Business DUNS Number
Short for Data Universal Number System, it’s a worldwide numerical 9-digit identification number that allows you to register your business. Although it might seem like a step done too soon for a small business, it will definitely pave the way for many opportunities like loans or competing for government grants, not to mention that it raises your credit score. Many private vendors work only with a DUNS number.
Establish Trade Lines with Vendors
Establish good relationships with your vendors or suppliers because it definitely raises your credit score. With start-ups, it’s often hard getting tradelines to report to business credit bureaus because you haven’t established a high credit score yet. Many suppliers, however, can extend trade credit allowing you to pay weeks after you’ve gotten the items needed. A popular way to do it is to use Net 30 vendor accounts where you establish small vendor lines of credit for 30 days, meaning that you pay your full amount that is due in 30 days. You need to also make sure they’re reporting back your payment history to the credit reporting agencies to help with your credit score.
Final but Necessary Steps
One thing that will definitely help you is to establish clear and accessible business contacts with a dedicated phone line and an address for your office. You also need to manage your finances responsibly, meaning you pay your suppliers on time and watch your spending habits. If you decide to get a business loan, be sure to get one from business lenders who report to credit bureaus with your payment history; believe it or not, it actually helps raise your score.
It’s How You Start
In order to pave the way for your small start-up, you need to be patient and realize success doesn’t come overnight. It may seem hard at first trying to build your credit from scratch, but believe these methods and you’ll realize that it will open up more opportunities than you could have ever imagined and will show your lenders and suppliers that you’re on the right track.
