Nine Steps Small Businesses Should Take to Build Business Credit

February 3, 2020 Published by

Most small businesses get their initial funding either through a cash infusion from the savings of an owner, or through a personal loan taken out by an owner, but once the business is up and running it should establish a separate credit history. A separate credit history will allow a business to secure a loan or a line of credit that is independent of ownership. It can also help a business secure better terms from its landlord and vendors.

While the major credit monitoring agencies each collect their own mix of data from different sources, a small business that takes the following steps should ensure that they are being monitored and begin establishing a positive credit history:

Form a limited liability company (LLC) or incorporate the business. There are advantages and disadvantages for each business structure that should be considered when choosing between an LLC and incorporation, but for the purposes of establishing credit outside of ownership, either structure will work. Additionally, both business structures help protect the personal assets of the owners from the business’s creditors by establishing the business as a separate entity.

Use Vendors that Report Payment Information. Most vendors do not report payment information to the credit bureaus, but there are some well-known suppliers that will offer short-term credit to new businesses and report payments to credit rating agencies. Seven of the most well known (along with the ratings agencies to which they report) are:

  • Staples. The nationwide retailer of office supplies will often offer a $1,000 net 30 line of credit to new businesses (Dun & Bradstreet);
  • Quill. A well-known office supply distributor, Quill was acquired by Staples in 1998 but still operates as a stand-alone brand. If your business has no credit, the company will request that you pre-pay for 90 days before establishing payment terms. At the end of the 90-day period, the company will review your credit and set up net-30 terms that include a credit line that is based on the first 90 days. The company also offers customers installment payments that allow for invoicing over six payments at 0% interest (Dun & Bradstreet);
  • Strategic Network Solutions. A provider of information technology that allows new businesses to apply for credit using information provided about the company and its principals (Experiean and CreditSafe);
  • Grainger. A supplier of industrial goods that will offer new companies with a limited credit history a $1,000 line of credit that can be increased once a payment history has been established (Dun & Bradstreet);
  • Newegg Business. A provider of consumer electronics for businesses that will allow you to establish a $500 to $1,000 net 30 account with a DUNS number (see the Dun & Bradstreet entry below to learn how to get one) and a bank reference (Dun & Bradstreet);
  • Summa Office Supplies. Will provide a $2,000 NET 30 account to businesses that make an initial purchase of $60 or more (Dun & Bradstreet);
  • Uline. A packaging supply and industrial goods distributor that allows for businesses to apply for net 30 payment terms. If your business has no credit history, they may require that you prepay for your first order (Dun & Bradstreet and Experian).

Obtain a Federal Tax Identification Number (EIN). The EIN is a unique identifier issued by the IRS that a business will need to establish a bank account, which we recommend anyway (see below). The IRS issues EINs for free and it helps identify a business as operating separately from ownership. Finally, and perhaps most importantly, an EIN will allow you to apply for a business credit card in your business’s name.

Get a business credit card. If your business has incorporated or registered as an LLC, you should apply for the card in your company’s name once you have an EIN (which the banks will want before they issue you a card). Nearly all major credit cards report borrowing and payment information to the major reporting agencies, so a business card is a wonderful way of establishing a credit history. Card issuers are generally looking for the following when a small business applies for a card:

  • The legal name of the business;
  • The EIN of the business;
  • The type of business and its structure;
  • A general description of the business and the industry;
  • Your role in operating the business;
  • The address and phone number of the business;
  • How long the business has been in operation;
  • The number of employees;
  • Annual business revenue ($0 can be acceptable if you’re just starting out); and
  • An monthly estimate of anticipated charges on the card.

While you are seeking a credit card for your business, it is likely that card issuers will look to your personal credit when evaluating the a new business’s credit worthiness. Obviously, the better your credit it, the more likely that your new small business will be issued a card. It is also likely that you will need to sign a personal guarantee that you will be responsible for the unpaid debt of the business.

Some of the more more popular cards for small business include: the Case Ink Business Preferred Credit Card, the Capital One Spark Classic for Business, and the Discover it Business Card.

Another option for new small businesses seeking to establish credit are secured cards, which usually do not require a credit check. Secured are used just like regular credit cards, but they require an up-front cash deposit that will be used as collateral in case of default on your payments. That means your credit limit is generally the amount of the deposit. Because the amount held by the credit card issuer is treated as a deposit, you will be billed monthly when you use a secured card and your payments will be reported to the credit reporting agencies to help establish business credit.

The top issuers of secured credit cards for small businesses include: the Wells Fargo Business Secured Credit Card, the BBVA Compass Business Secured Visa Credit Card, and the Business Edition Secured Visa Card.

Obtain a Business Gas Card. A business gas card (or business fuel card) can be either secured or unsecured, but the unsecured cards are generally easier to qualify for than most general-purpose credit cards. The primary benefit of using a gas card is that they will report your payment information to the major credit reporting agencies. However, in exchange for the easy credit, many gas card issuers will charge customers a monthly service fee in addition to any interest that may accrue.

Some of the top gas cards for small businesses include: Exxon MobilBusiness, the Shell Small Business Card, the Phillips 66 – Conoco – 76 Commercial Credit Card, the Valero Commercial Credit Card, and the Chevron and Texaco Business Card.

Get a seperate business phone number. If you are running a business by yourself establishing a separate phone number solely for the business to use probably seems like an unnecessary expense, but getting a seperate number will get your business listed in the directories the credit agencies use to locate businesses

Open a bank account for the business. A separate bank account lets creditors know that a business’s finances are separate from those of ownership. The US Small Business Administration recommends opening a seperate business account as soon as a business receives its EIN.

Pay your bills on time or early. This is especially true when it comes to debt. A history of late payments will bring down a business’s credit rating. Additionally, some credit reporting agencies will provide a boost in a business’s credit score when bills and debt are paid off before their due date.

Make sure your creditors are reporting to the various credit agencies. If your business is able to get a small business credit card or a bank loan, make sure that all of the major credit reporting agencies know about it. Not all banks and lenders report their credit transactions to all of the credit reporting agencies. Monitoring your credit reports will both ensure that your business is being tracked by the agencies and that they are aware of all of your debt and payment history.

How Do The Credit Reporting Agencies Score Your Credit?

The three largest business credit reporting agencies are Equifax, Experian and Dun & Bradstreet. Each of the agencies collects different information and uses their own verification methods, but below is a basic description of how each agency measures a business’s creditworthiness:

Equifax offers three types of scores for business credit that are based on credit risk, payments and the possibility of business failure. The credit risk score measures the probability that a business will become delinquent in its payments by examining such factors as a company’s size, available credit and data on delinquent payments. A business’s payments score is based on its history of making on-time payments based on data collected from creditors and vendors. Finally, the business failure score is based on the probability that a business will fail based on such factors as how close a business is to its credit limits, delinquent or late payments on accounts, and evidence of supplier invoices being charged off.

Experian uses a business credit score and other information such as account histories, payment trends and public records in its CreditScore report. The business credit score is based on information from lenders, suppliers and court filings along with a business’s credit history.

Dun & Bradstreet uses its Paydex score to measure a company’s credit risk. That score is determined based on information that is reported to Dun & Bradstreet or data collected by its partners. To receive a Paydex score a business must have been issued a DUNS number through the company’s website and Dun & Bradstreet must have payment records from at least four of the company’s vendors.

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This post was written by Sean Allaband

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