How to build business credit fast
When you’re starting a business, it’s important to establish business credit as soon as possible. This will help you secure small business loans and lines of credit when you need them and will also make it easier to get approved for vendor accounts. Here are a few tips on the fastest way to build business credit:
- Determine the Best Business Structure
- Get a Federal Tax ID Number from the IRS
- Open a Business Bank Account
- Create a Vendor/Supplier relationship with businesses that report to the Credit Bureaus
- Pay your bills on time
- Get Listed in Business Directories
- Check Your Company Credit Reports
- Apply for a Business Credit Card
If you want to open one or more credit lines for your business, you need a good business credit history. This means that your business will have its own business credit reports, separate from your personal credit report as an individual.
Having good personal finances will mean your personal credit score is higher, but it won’t automatically translate to a good business credit score. Keep in mind the same methods you used to build your personal credit history will also apply when you start building business credit.
When you create an LLC, LLP, or corporation, it is considered a distinct legal entity with the ability to sign contracts. It’s regarded as a separate entity from you as a person as long as you follow a few simple steps which we will discuss in this article.
If you operate as a sole proprietorship, it’s crucial to remember that there is no legal or financial separation between you and your business. If this is the situation, any activity will be solely attributed to you as an individual, appearing on your personal credit reports. If you start your small business as a sole proprietor, we still highly suggest you separate personal and business finances for when you are ready to establish a separate entity and build credit.
The first guideline for maintaining a separation between your business and personal funds is to start establishing corporate credit in your company’s name. Here are some simple methods to develop business credit fast.
Step 1 – Determine the Best Business Structure for You
To establish your business as a unique legal entity, you must decide on a business structure such as an LLC, LLP, or corporation. Remember that sole proprietorship does not result in the formation of a new company.
What is an LLC?
An LLC is a business structure allowed by state statute. An LLC, or limited liability company, is a hybrid business entity that has characteristics of both a corporation and a partnership. Like a corporation, an LLC has limited liability for its owners. This means that if the LLC is sued, the owners are not personally liable for damages. However, like a partnership, an LLC has “pass-through” taxation. This means that any profits or losses the LLC makes “pass-through” to the LLC owners and are reported on their individual tax returns.
An LLC can have one owner, called a single-member LLC, or multiple owners called a multi-member LLC. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs, or foreign entities.
What is an LLP?
A limited liability partnership (LLP) is a business structure in which partners have protection from personal liability for the debts and actions of the LLP. LLPs are often used by professional service firms, such as accounting, law, and consulting firms.
To form an LLP, partners must file a certificate of formation with the state in which they plan to do business. The partnership must also prepare and file an operating agreement, which outlines the LLP’s business purpose, how it will be managed, and the rights and responsibilities of the partners.
What is a Corporation?
A corporation is a legal entity that is separate and distinct from its owners. A corporation is created when it is incorporated, typically by filing articles of incorporation with the secretary of state in the state where it will do business.
The main advantage of forming a corporation is that it limits the personal liability of its owners. This means that if the corporation is sued, the owners are not personally liable for damages.
The main disadvantage of forming a corporation is that it has a complex structure, and it can be more expensive to form and operate than other business structures.
So which structure is better? We recommend consulting with a business attorney and a CPA to determine which route you should go.
Once you have decided on the business structure that is right for you, you can begin to establish corporate credit in your company’s name.
Step 2 – Get a Federal Tax ID Number from the IRS
After you’ve created your business entity, the next step is to register it. This phase is determined by your company’s structure and where it is located.
If you have a sole proprietorship or partnership, you will need to obtain an Employer Identification Number (EIN) from the IRS. You can apply for an EIN online, by fax, or by mail.
If you have an LLC or corporation, you will need to register your business with the state in which it is located.
A good resource for selecting the proper organizational structure for your business and registration, see SBA’s Business Guide.
Get a tax ID number (EIN) from the IRS.
Use the IRS’ free help tool to get a tax ID for free. This is a nine-digit number assigned to your company that you’ll use for things like filing corporate taxes, establishing a business bank account, obtaining licenses and permits, and applying for firm credit.
To apply for an EIN online, visit the IRS website and complete the online application. You will need to have the following information handy:
The name and taxpayer identification number of the party responsible
Your business structure
The date your business began or will begin operating
Your business address
Your mailing address, if different from your business address
The name and Social Security number of the principal officer, general partner, or grantor
A list of all the LLC members or corporation shareholders
Step 3 – Open a Business Banking Account
Once you’ve obtained your federal tax ID (FEIN), you’ll want to open two business bank accounts for your business. Open a business checking account for Operating, and business savings account where you can save money from the good months to offset the slow business months to help make sure you make your payments on time. This is a necessary step in establishing a clear distinction between personal and commercial spending.
Your company’s financing potential is largely determined by the strength of your banking connections. Your business bank account not only serves as a credit reference on the small business loan applications, but it also gives important data for lenders when reviewing small business loans.
Step 4 – Create a vendor/supplier relationship with businesses that report to Equifax or Experian.
Applying for net terms with vendors and suppliers is one of the simplest methods to build business credit and improve your business credit file. As you build business credit, the credit lines you establish with specific Net 30 accounts will report as a positive business credit history as you make payments on time. Purchases and payments on credit made for items like supplies, inventory, or other business expenses are recorded to business credit reporting agencies as a result of those transactions.
This process produces your company’s credit history and business credit report. A business credit rating (score) is generated after your firm has several tradelines reporting.
Remember to pick suppliers and manufacturers that are reported to a business credit reporting agency. Every connection you make also acts as a trade reference that may be utilized in the future when applying for credit.
Step 5 – Pay your bills on time
One of the best ways to build business credit is to pay your bills on time. This includes invoices from vendors, utilities, and any other type of business expense. The prompt payment shows that you’re a responsible borrower and increases your chances of getting approved for future loans and lines of credit. You never know who is reporting to the Credit Monitoring Agencies.
Step 6 – Get Listed in Business Directories
Being listed in online business directories can help verify that you’re an actual business to creditors. Creditors will check your profile on several reputable sites, so having consistent information across all your directory citations can help verify your business identity.
Listing your company in these directories can help build your business credit score and make it easier to get approved for loans and lines of credit. Some of the most popular business directories include the Better Business Bureau, Dunn & Bradstreet, and Manta.
To get started, look for business directories that list firms in your field or region. Then, develop a profile for your company and include your business contact information. Make sure you provide the same information to each directory every time you submit your data.
Step 7 – Check Your Business Credit Reports
There are three major business credit bureaus, so it’s critical to keep track of each of your business credit file when trying to establish business credit. Each agency obtains data from a variety of sources and may include different information about your company to help maintain your business credit history.
Three Main Business Credit Bureaus
- Dun & Bradstreet
- Experian Business
- Equifax Small Business
The good news is that each of the business credit agencies has a simple method for you to update basic information about your company. If you discover any outdated or incorrect data, you should notify the business credit bureau immediately so that it may be updated.
You may get greater credit approvals, better interest rates, and more flexible loan terms and conditions if you have a strong business credit history.
Building business credit is a process that takes time, but it’s well worth the effort. A strong business credit score can give you access to the financing you need to grow your business and build long-term success.
Step 7 – Use Business Credit Cards
A business credit card is another way to establish credit. They can be hard to get straight out of the gate when trying to build business credit quickly, which is why we listed it as step 7. When you are trying to build a small business credit profile, it pays to wait a few months to give the Net30 accounts time to report to the business credit agencies before you apply for a business credit card. You want to make sure you have a solid business credit score before you apply, as this will give you the best chance of getting approved.
There are a few business credit cards that are easier to get approved for than others. If you don’t have enough business credit, consider a secured business credit card to start with. A secured credit card is backed by a deposit, which acts as collateral in case you can’t pay your bill. Once you’ve established good payment history, you may be able to transition to an unsecured business credit card.
Depending on your industry, some credit cards are better suited than others. Just like you select personal credit cards to match your lifestyle, you will want to match your business credit cards to match your needs as a business owner.
Once you have solid business credit scores and qualify for a business credit card, make sure you use your credit limit wisely. When you utilize a business credit card, the lender reports your payment history to the major business credit reporting agencies. This helps you develop a good payment record, which is one of the criteria creditors consider when assessing your trustworthiness.
Look for a business credit card that has rewards or cashback on your frequent purchases to help offset the cost of using the card and boost your bottom line. Also, avoid damaging your credit score by keeping debt levels low and making payments on time.
Conclusion
Building business credit can be a daunting task, but it’s well worth the effort to secure financing for your company. In this article, we’ve outlined seven steps you can take to establish business credit quickly. Make sure you check your business credit reports regularly and update any outdated information. Use business credit cards wisely to build a good payment history. And finally, be patient – it takes time to build a strong business credit score. But following these steps will help you get there faster.
