As a corporation, establishing and maintaining a strong business credit profile is essential for various reasons. It can help you secure better terms on business loans, negotiate favorable terms with suppliers, and even lower your business insurance rates. Building business credit from the ground up or rebuilding it after financial struggles requires a systematic approach. In this comprehensive guide, we will provide you with a step-by-step process to build solid business credit for your corporation.
Section 1: Register Your Corporation and Obtain an EIN
The first step towards building business credit is to register your corporation and obtain an Employer Identification Number (EIN). Registering your corporation’s name and structure will depend on the requirements of your jurisdiction. Some states may not require sole proprietors to register if they operate under their own name. However, it is still advisable to obtain a local business license if necessary.
Applying for an EIN with the IRS is crucial, as it serves as a business tax ID and may be required by most lenders and suppliers. While it may not be a prerequisite for building business credit, having an EIN can streamline the process and provide credibility to your corporation.
Section 2: Request a DUNS Number
To establish a business credit score, obtaining a DUNS number from Dun & Bradstreet is necessary. A DUNS number is a unique nine-digit identifier used by lenders and businesses to assess your credit profile and financial health. You can request a DUNS number for free on Dun & Bradstreet’s website.
While Dun & Bradstreet is a major business credit bureau, other bureaus like Experian and Equifax do not require a special identifier. However, having a DUNS number is essential for applying for federal grants and showcasing your corporation’s creditworthiness.
Section 3: Open a Business Credit Card
One of the most effective tools for building business credit is a dedicated business credit card. Although business card issuers often consider your personal credit when approving applications, you can obtain a business credit card without an established business credit profile. It is crucial to pay off the card in full each month or keep the balance below 30% of the available credit and make regular, on-time payments.
Most small-business credit cards report your activity to business credit bureaus, helping you build a positive credit score. It is important to note that missed payments and delinquencies can negatively impact both your personal and business credit scores. If you have poor personal credit, secured business credit cards requiring a security deposit can be a viable option.
Section 4: Establish Trade Lines with Suppliers
Building trade credit with suppliers is an effective way to boost your business credit score. Many suppliers offer trade credit, allowing you to pay for inventory several days or weeks after receiving it. To ensure that your trade credit payments are reported to business credit bureaus, it is important to work with suppliers who cooperate with this process.
You can establish trade lines with various vendors, such as water or office supplies distributors. If these vendors do not report to credit bureaus, you can list them as trade references on your account. Dun & Bradstreet will then follow up to collect your trade data, further enhancing your business credit profile.
Section 5: Pay Creditors Early
The payment history of your corporation is a crucial factor in determining its creditworthiness. While making on-time payments is good, paying creditors early can have an even more positive impact. Dun & Bradstreet assigns perfect Paydex scores, which measure payment history, to companies that consistently pay early.
In addition to payment history, factors such as the length of your credit history and credit utilization also influence your business credit score. Maintaining positive relationships with creditors and using less than 30% of your available credit, including business credit cards and lines of credit, can further strengthen your credit profile.
Section 6: Borrow from Creditors that Report to Bureaus
Taking out small-business loans and making timely payments can significantly boost your business credit score. However, it is essential to ensure that the lenders you choose report to business credit bureaus. Not all lenders report business credit information, so it is crucial to inquire about their reporting practices before obtaining a loan.
While banks typically report to credit bureaus, they often have strict lending criteria and may be challenging to qualify for unless you have excellent credit and an established business history. Online business loans, on the other hand, are often more accessible for new businesses and those with poor credit. Many online small-business lenders, including OnDeck, LendingClub, Funding Circle, and Bluevine, report to business credit bureaus. However, some lenders like SmartBiz, Fundbox, and merchant cash advance companies do not report.
Section 7: Avoid Judgments and Liens
Negative marks on your business credit report, such as judgments, liens, and bankruptcy filings, can significantly impact your credit score and credibility. Unpaid taxes or business debt can result in a lien, which grants creditors the legal right to seize your property to satisfy the debt. Unpaid debts may also lead to court rulings or judgments against your corporation to collect the owed amount.
It is crucial to avoid these negative marks as they can have long-lasting effects on your business credit profile. Bankruptcies, for example, remain on your Experian credit score for ten years, while tax liens, judgments, and collections can persist for almost seven years.
Section 8: Keep Your Credit Information Updated
Similar to personal credit, regularly monitoring and updating your business credit information is essential. There are three main business credit bureaus: Dun & Bradstreet, Experian, and Equifax. It is recommended to check your business credit score with all three bureaus to ensure accuracy and completeness.
Review your trade lines to ensure all accounts are accounted for, and report any errors, such as incorrect addresses or negative marks, to the respective business credit bureau. Keeping your information current and accurate will help maintain a strong business credit profile.
Section 9: Additional Tips for Building Business Credit
- Maintain Financial Discipline: Consistently paying bills on time, managing debt responsibly, and avoiding excessive borrowing can contribute to a solid business credit profile.
- Separate Personal and Business Finances: Keeping personal and business finances separate through separate bank accounts and financial records can help build a strong business credit profile.
- Establish Relationships with Local Banks: Building relationships with local banks can provide access to credit lines and other financial resources specific to your community.
- Monitor Your Credit Report: Regularly reviewing your business credit report will help you identify any discrepancies or errors that may negatively impact your credit score.
- Consider Credit Builder Programs: Some financial institutions offer credit builder programs specifically designed to help businesses establish or improve their credit profiles.
- Network and Collaborate: Building relationships with other businesses in your industry can lead to trade references and potential partnerships that can positively impact your creditworthiness.
- Section 10: Conclusion
Building a strong business credit profile for your corporation requires a systematic approach and consistent financial discipline. By following the step-by-step guide outlined in this article, you can establish a solid foundation for your business credit and unlock numerous advantages, such as better loan terms, lower insurance rates, and improved supplier relationships. Remember to regularly monitor and update your credit information to maintain a healthy business credit profile. By implementing these strategies and maintaining financial responsibility, your corporation will be well-positioned for long-term success. You can compare business credit services here.