How to Build Your Business Credit
Updated: May 5
Have you ever owed on a bill or credit card and for whatever reason, you were late paying your bill and got hit with a late fee? Don’t feel bad it’s happened to the best of us.
Owing interest on debt will work against you if not managed correctly. Using credit to maintain a lifestyle and incurring interest on a the balance may cause you to pay for the same item 2 or 3 times over if you let the interest compound against you.
BUT with a business, using credit can work to your advantage. With a proper understanding of your marketing strategy and product development, you can use credit to fund the start of your business and pay back what you’ve borrowed with the revenue gained from the sale of your product or service.
Doing this properly will enhance your business credit score, which can be properly obtained by getting your DUNS # from Dun & Bradstreet, as well as establishing your business credit profile with Experian, and Equifax. Even if you don't need extra capital for your business currently, building a healthy business credit file will show potential lenders, and partners that you are a trustworthy organization to do business with.
3 Vital Steps Before You Can Build Your Business Credit
First things first, you MUST have your business established with the State Corporate Commission (Virginia) where you live.
Not all states have a State Corporate Commission or use that exact terminology to refer to the agency responsible for handling business entity formation and registration.
For example, in California, businesses are incorporated through the Secretary of State's office, while in Texas, the agency responsible for business entity registration is the Texas Secretary of State.
In some states, like New York, the Department of State handles business entity formation and registration, while in other states, such as Florida, it's the Department of State's Division of Corporations.
It's important to research the specific agency responsible for business entity formation and registration in your state to ensure you follow the correct process and meet all the necessary requirements.
Secondly, you should open a separate business bank account. This will help you keep your business finances organized and make it easier to track your expenses. It will also make it easier to establish a credit history for your business.
Lastly, an Employer Identification Number (EIN) is required to file your company’s taxes. Banks and potential business partners can also request it when you fill out paperwork. You can apply for a free EIN on the IRS website.
BUILD, GROW, AND MAINTAIN YOUR BUSINESS CREDIT
A Paydex score is a credit rating system used by Dun & Bradstreet, a leading business credit reporting agency. It is a numerical score that measures a company's creditworthiness based on its payment history with suppliers and vendors.
The Paydex score ranges from 0 to 100, with 100 being the best possible score. A score of 80 or higher is considered a good credit score, while scores below 50 are considered poor. The score is based on a company's payment performance over the past year and takes into account the number of payments made on time, the number of payments made late, and the number of payments that were never made.
The Paydex score is important because it is often used by lenders, suppliers, and vendors to determine a company's creditworthiness. A high score can help a business qualify for loans, credit lines, and other types of financing. It can also help a company negotiate better terms with suppliers and vendors, such as longer payment terms or discounts for early payment.
Creditworthiness may be established and maintained by leveraging what’s known as net30 payment terms with a supplier, giving you 30 days or more (net45, net60, net90) to pay the balance of your purchase. Done correctly this will improve your business credit score, making you more attractive to lenders for financing.
Examples of Companies Offering Net 30 Terms
Amazon Pay By Invoice: Added Feature of Amazon Business Membership
Creative Analytics: Digital Marketing and Management Consulting
Shirtsy: Custom Print T-Shirts & Apparel
Quill: Office Supplies
Grainger: Industrial Supplies
Uline: Shipping Supplies
Global Industrial: Industrial Equipment
"Many businesses’ business credit files are evaluated when they bid on contracts or shop their services to potential business partners. Companies want to make sure they are working with associate businesses that can deliver products on time or complete projects as promised – and have a low risk of going out of business." - Dun & Bradstreet
Trade lines are accounts that you open with vendors or suppliers. These accounts can help you build a credit history for your business. When you open a trade line, make sure that the vendor or supplier reports your payments to the credit bureaus. This will help you build a positive credit history.
Buying a vehicle in your company name also allows you to build your business credit. You may initially have need a PG (Personal Guarantee aka Co-sign) to execute the purchase, but making on time payments will reflect positively on both the PG's and the business' credit score.
A business credit card can help you build credit quickly. Look for a card that reports to the credit bureaus and offers favorable terms. You may need to start with a secured credit card if you don't have a credit history yet. As your credit score improves, you can apply for unsecured credit cards with higher limits and better rewards.
In conclusion, building business credit is an essential step for any entrepreneur or small business owner. By incorporating your business, opening a separate bank account, establishing trade lines, obtaining a business credit card, using net 30 terms, monitoring your credit report, and using your credit responsibly, you can build a strong credit history that will help your business succeed. Remember to always do your research and stay informed on the latest best practices for building business credit. With time and effort, you can achieve your business goals and build a strong financial foundation for your future.
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