How to build business credit

Establishing and building credit for your business is a crucial step in making running your business easier. Having a healthy business credit history can help you scale your business and get approved for financing. While personal credit can be helpful in the early stages of your business, at some point, you’ll need to separate your personal credit from your business credit.

What is business credit?

Business credit is a measure of how responsible your business is when it comes to managing its finances. Similar to personal credit, business credit looks at financial activity related to running your business. Factors that contribute to your business credit include the number of trade experiences, the number of lines of credit your business has, balances owed on each line of credit, credit utilization, consistency in paying debts and bills on time, and any public records such as liens, bankruptcies, or judgments.

Why does business credit matter?

Separating your personal credit from your business credit is important for several reasons. Firstly, relying solely on personal credit can limit your business’s purchasing power and hinder its growth. Additionally, using personal credit for business expenses can make it difficult to separate personal and business transactions during tax season. By establishing business credit, you can apply for business loans and credit cards without personal liability, making your business responsible for repayment. Business credit also affects your ability to qualify for financing and the terms you’ll receive, including interest rates and borrowing costs.

How long does it take to build business credit?

Building business credit takes time, and it’s a slow and steady process. On average, it takes about three years or more to build business credit. Some creditors may require just one year, but it’s not the norm. They want to see that your business has been around and has a track record of responsible financial habits. Building business credit requires establishing a track record of good financial habits, including borrowing responsibly, paying debts on time, and handling financial obligations well.

Steps to build business credit

1. Apply for a federal tax ID: Apply for an Employer Identification Number (EIN) through the IRS website. The credit bureaus use your EIN to track your business.

2. Open a business bank account: Open a bank account in the name of your business and use it for all business deposits and withdrawals. Keep good records, avoid bounced checks and overdrafts, and maintain an adequate balance to show creditors that you are responsible with your finances.

3. Form a business entity: Consider setting up a limited liability company (LLC) or another business entity to separate your business finances from your personal finances. Consult with an accountant and an attorney to determine the right business entity for you.

4. Apply for a business credit card: Using a business credit card for all business charges can help establish business credit. Pay your balance in full every month if possible, and avoid maxing out the card, as high credit utilization can lower your business’s credit score. Research different business credit card options to find the best fit for your business’s needs.

5. Establish trade credit: If your suppliers offer financing terms, opening vendor trade lines can help create credit history. Regularly do business with a big box office supply store or hardware store and ask if they offer a line of credit or a store credit card. Use it for your purchases and pay the bill on time.

6. Ensure the major credit bureaus are tracking you: The three major credit bureaus that track business credit are Dun & Bradstreet, Experian, and Equifax. Check their websites to see if you are being tracked and view your business credit report.

Building business credit is a necessary step in establishing financial stability and growth for your business. By following these steps and maintaining good financial habits, you can establish a healthy business credit history and improve your chances of getting approved for financing.

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