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Steps to Establishing Business Credit
With the recent economic changes, it is harder for businesses to obtain loans to grow their business. Here are steps you can take now to establish good business credit, so loans are accessible when the business needs one.
First separate the business and its finances from your personal credit with these key items;
- Incorporate: The business must either be a corporation or a limited liability company (LLC).
- Get an Employer Identification Number (EIN): Issued by the IRS.
- Open a standard checking account in the company name and EIN.
- Apply to establish a company credit card: If you use the company credit card, be sure to pay the bills on time to build good credit history.
Now start building your credit by doing the following:
Pay your bills on time or early:
- Some vendors offer discounts if pay in advance. If you are able to pay at discount you are cutting your operating costs. These vendors may be willing to serve as a credit reference in future.
- Open a savings account or CD tied to the business checking account. Put some money in it.
- Get a loan: Use the savings account or CD as collateral to get a small loan from the bank, in the name of the business. Pay the loan back with on time monthly payments. This really will build business credit by showing the business can pay back its debt.
Learn your business credit score: Credit score information is available from agencies like D&B and Equifax.
- A complex statistical model is used to determine a credit score, which is a prediction of likelihood of default. Factors included in the model are: company size, industry, payment habits, and outstanding balances of open accounts, length of credit history and other factors.
- Get your credit report, at least quarterly, to make sure there are no errors. You do not want your report impacted by a bank error or a long ago resolved judgment against the company.
Saving money by paying bills on time or early and getting the cash discount or reduced financing cost help to solidify your credit history and ultimately increases your working capital and cash flow. It is important to pay company bills today so the expansion loan needed in the future is easily applied for.