5 Steps to Help You Build Good Business Credit

Posted by on November 1, 2011 in Business Financing [ 0 Comments ]

Now that the Halloween weekend is over, it’s time to shift away from the candy and back to the business finances. Whether your business is still in its rookie years or is now considered a seasoned veteran, building business credit will always be important. As you get started, your company will begin to develop a business profile. A business profile is just a fancy way of saying your company will have a report that lists out all financial obligations and how you handled these fees.

Business profiles are compiled using information provided by banks, credit card companies, vendors, etc., and they are created by credit agencies. Creating a good business profile, or establishing good business credit, proves that your company has financial stability and is able to be responsible when it comes to finances. This is extremely important because anyone can gain access to this report if they wish. A few instances include:

  • Business partnerships will want to work with a company that has good business credit
  • Vendors will also want to make sure a company is capable of paying bills on time
  • Investors will not want to invest in a company that will not be able to manage his/her money
  • If you ever want to sell your business, you will have a better chance of success if it has good credit
  • Banks and commercial lenders will not give any small business loans before looking through a credit report

Although this may seem like common sense, building up business credit is about more than just paying bills on time. Many business owners who manage their personal finances flawlessly have a difficult time doing the same with an entire company. You will be dealing with larger numbers and managing your personal finances at the same time, so building good business credit often falls through the cracks. Make sure that your business is taking the time to establish good business credit:

How to Establish Business Credit

1. Legal Business Entity—In order to receive a business loan or investment, you will need to set up a legal business entity—such as an LLC or corporation. However, you will find there are a few business structures you can choose from; some of which may blend the lines between business finances and personal finances. In other words, it is extremely important to decide which business structure works best for you. For more information about choosing a business structure, follow this business structure info graphic from Business.com.

2. Tax ID Number (EIN)—Although it may sound confusing, signing up for a tax ID number is very simple. If you want to start building business credit, this is a necessary step in your process. Banks will ask you for this number when you open a bank account, so apply for this number through the IRS site and click on “Get a Tax ID (EIN) Online.”

3. Credit Bureaus—It is your job to make sure you know what is going on with the credit bureaus. If your company has been paying bills, but you have not seen a credit report, don’t sweat it. If you’re a little late in the game, first check and see if your business already has a score. If not, apply to get a score on one of the major Credit Bureaus websites:

– Dun & Bradstreet        – Equifax         – Experian       -TransUnion

4. Separate Personal Credit—Startup companies often fall into this trap because the businesses are so small. This may seem like the easiest solution at the start, but this can be a costly mistake. First, your personal credit can affect your business credit and vica versa. Although you may think your business finances will not get out of control, you always want to be on the safe side and protect your personal credit. In other words, if your business goes down you had better make sure you aren’t going down with it.

Singing up for a business credit card is one of the most popular ways to make sure your credit scores remain separate. According to the online small business information website AllBusiness.com, “…more than 65 percent of small businesses utilize business credit cards, and this number continues to rise.”

5. Develop an Accounting System—Telling someone to pay his/her bills on time is common sense, but there are ways to help make sure this task gets done correctly. Your company should set up automatic bill payments as well as hire an accountant to help you manage your cash flow.

There are obviously a few steps you must take before you can even begin establishing business credit. For many companies, this is the most confusing part. Although it may seem complicated, this is one of the most important things you will do for your company. I think you will find that is it not as stressful as it may sound. If you disagree, well then at least you have that Halloween candy to help get you through the process.

Photo Credit tvtropes.org

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