Building Small Business Credit

Whether you are just starting your business or growing an existing company, you might need to get financing. Business financing takes two forms — investor financing and lender financing. Lender financing often comes from a bank or another type of financial institution. Your business needs to pay back lender financing, usually on a set schedule and with interest. Investor financing means that a company or individual buys a portion of your company. The investor gets some say about what goes on with your company.

Before a financial institution agrees to lend you money, it wants to verify that your business will likely repay the amount it borrows. Your company can establish credit too. Here’s what to know about building business credit to launch your company.

The Importance of Establishing Business Credit

Establishing business credit allows you to keep your business finances and identity separate from your personal finances and identity. While using your personal credit can make it easier to get loans, doing so can put your personal finances at risk. For example, if you use your home as collateral on a business loan and the business doesn’t succeed, you risk losing your home.

Establishing a separate credit history for your company allows it to build its own reputation. As you build up your company’s credit, the business itself is likely to become more attractive to lenders. Having a solid business credit history also makes your company more attractive to potential customers. A business’s creditworthiness is readily accessible to anyone who’s curious. Anyone interested in working with your company can look up credit history and decide to go forward or not based on what they find.

The 4 Types of Business Credit

As you get your business underway, it can be tricky to get a loan from a traditional lender at first. Fortunately, there are several other credit options available to newly established companies that will help you establish a track record of on-time payments, making your company more attractive to banks and other types of lenders.

• Vendor: The vendors your company works with might extend you credit, such as net-30 payment terms. They might ask you to put down a deposit or make an initial payment before offering your company short-term financing.
• Supplier: Like vendor credit, supplier credit allows you to buy now and pay later for items your company might need. The business that supplies the primary material or ingredient in your business’s product might agree to let you pay 30 or 60 days later. With supplier credit, your company has the chance to sell the products it makes before it must pay for them.
• Retail: Retailers often offer store-branded credit cards to businesses. Like a standard credit card, a retailer’s card lets you make purchases and pay later. Depending on when you pay off the card, interest and fees can accrue.
• Service: When your company opens accounts with utility companies or other service providers, such as cell phone or internet service providers, it establishes service credit. As with vendors, service providers might require your business to put down a deposit at the beginning.

It’s important to verify that information gets reported and appears on your company’s credit reports. That way, lenders who review your company’s credit report and history can see a pattern of reliability and timely payments.

How to Build New Business Credit

It takes time and effort to set up your business credit. Here’s how you can build business credit from the beginning.

• Incorporate your business: It’s critical that you keep your business credit and finances separate from your personal credit and finances. The first step to doing that is to form a limited liability company (LLC) or incorporate your business. If you remain as a sole proprietor or partner, your business return and personal tax return are the same. As an LLC or corporation, your business will have its own tax return separate from yours.
• Get a federal employer identification number (EIN): An EIN is essentially a company’s social security number. You’ll need an EIN to file tax returns and to open business bank accounts. Vendors might also require an EIN when setting up credit or before they will work with your company. An EIN is also necessary if you plan on hiring employees, too.
• Open a business bank account: Your business needs its own bank accounts to eliminate the risk of co-mingling personal and company funds. You’ll also need the account to pay your vendors, suppliers and employees as well as your business credit cards. It’s also recommended to separate your business and personal accounts.
• Open a business credit card: Get a credit card in your company’s name and use it to make purchases regularly, such as buying fuel for your company’s cars or for items you order for the office. Then, use the money in your business checking account to pay off the card each month.
• Separate business contact information: Even if you’re operating your business from your home, it’s a good idea to get a separate phone number for your company. You can get a separate cell phone for your business or get a VoIP phone number. In addition to a separate phone line, you might want to establish a separate mailing address for your company, such as a P.O. Box at a local post office. A business email address and website are also must-haves.
• Establish relationships with vendors that report credit: The key to building vendor credit is working with companies that report your payments and history to the business credit bureaus. When you’re looking for vendors, ask whether or not they report credit. If you already have relationships with vendors who don’t report to the bureaus, it might be worthwhile to switch to companies that do report.
• Register with Dun & Bradstreet: Dun & Bradstreet creates credit files for businesses. It also developed the Data Universal Numbering System (D-U-N-S), which companies use to identify businesses and evaluate their financial health. Registering for a D-U-N-S might be necessary if Dun & Bradstreet hasn’t already created one for you. Once you have a D-U-N-S, you can keep the information in your business profile up-to-date or make changes as needed if there are mistakes in the contact information or other identifying details.

In addition to Dun & Bradstreet, other credit reporting companies that might make a credit file on your company include Experian and Equifax. Check with your credit card company and vendors to see which bureaus they report to. You’ll want to keep tabs on your company’s file at each bureau to ensure that it’s accurate and up-to-date.

Ways to Build Business Credit

After you’ve created a credit file for your company, it’s time to focus on maintaining and improving your business credit. There are some factors that you can control. Here are some steps to take to strengthen your business credit:

• Use a business credit card wisely: Business credit cards benefit your company in several ways. They help you manage cash flow by letting you defer payments on items you need to keep your business afloat. Depending on the type of card your company has, you might also get rewards or cash back, which can help cut business costs. When you use a business credit card, make sure you pay off the entire bill, in full, by the due date to avoid interest charges or late fees. Learn more about Mid Penn’s business credit cards.
• Pay vendors early: Your business credit score depends on how soon you pay your vendors. Even if a vendor offers you net-30 or net-60 payment terms, the closer to the date of the invoice you pay, the better. Paying vendors early can raise your score, giving your business credit a potentially much-needed boost.
• Get loans from institutions that report to the credit bureaus: When it’s time to shop around for a business loan, confirm that the lender your company plans to work with reports the loan details to the business credit reporting bureaus. Also, make sure you only borrow what your company can comfortably afford to repay.
• Pay all other bills on time: Your company’s utility providers and other service providers might report payment information to the credit bureaus. To keep your business credit score up, you need to pay these bills on time. On-time payments also help you avoid late charges, saving your company money.
• Monitor your company’s credit reports: Mistakes can happen, so keep a close eye on your company’s credit report. It could be that credit information about a business with a similar name to your company appears on your report. A typo could make it look as though you were late on a payment. Fraud can also lead to inaccurate information on a report. Review your reports regularly and let the bureaus know if any information is incorrect. In the case of fraud, spotting a problem early on can help you avoid more complicated situations in the future.
• Keep your information up-to-date: Along with monitoring your reports for errors or fraud, it’s vital that you keep the information in your reports up-to-date. If your business address or phone number changes, make sure that information is reported accurately. Also, make sure that all the loans and accounts that should be on the report are there.

Benefits of Building Business Credit

Some of the benefits of building business credit include:

• Your company gets more favorable payment terms from new suppliers and vendors: The stronger and longer your business credit history, the more likely vendors and suppliers are to trust your business. A new vendor might review your company’s credit report and see that you regularly pay other vendors early and agree to give you a discount on invoices or to net-60 payment terms.
• Your company can better manage its cash flow: Having good credit allows your company to manage its cash flow better. When vendors and suppliers let you pay after you’ve received a product or service, you can make the most of available cash, rather than having to pay off your invoices immediately.
• Your company gets better interest rates and terms from lenders: When it’s time to apply for a loan from a bank or other financial institution, your business will likely get a more competitive interest rate and more favorable payment terms if it has a positive credit history.
• Your personal and business lives are kept separate: Building a credit history for your business means your personal life and finances can stay out of the picture. You don’t have to risk your personal possessions or worry that your family will lose everything if the business doesn’t succeed.

Mistakes to Avoid When Building Credit

As you focus on maintaining and improving your business’s credit, avoiding the following can help you keep your company’s credit strong:

• Don’t be a co-signer: While you might want to help a relative or friend, it’s best not to have your business co-sign a loan with them. When your business is a co-signer, it agrees to be responsible for someone else’s loan. If the other party misses payments or defaults, your company’s credit and reputation could suffer.
• Don’t close old accounts: The length of your company’s credit history influences its overall credit score. So even if you no longer use certain credit cards, it’s best to keep those accounts open, as closing them will shorten your credit history.
• Don’t max out your credit cards: Your business’s credit utilization ratio, or how much credit it uses at any given time, affects your score. A higher ratio can look riskier to lenders and contribute to a lower score. Limit how much your company charges on each card to 10% or less of the limit to keep your score high and your credit utilization low.

Work With Mid Penn Bank

If you’re getting your company started and are looking to open business checking and savings accounts or business credit cards, Mid Penn Bank can help. We also offer various business financing options to help your company prepare for growth or better manage its cash flow. To learn more about our business services, contact us today.

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