As a small business, you need capital to grow your business. But, many times, this capital will need to come from some sort of financing. And in order to receive this financing, your business needs strong credit. Many business owners make the mistake of relying on their personal credit for business needs, but if you really want to operate on trade credit, get financing, and so forth, it’s important to build your own separate business credit. Here are a few tips on how to do it fast:
1. Ensure Your Business is Registered
In order for the credit bureaus to start evaluating you as a business, your business needs to be on the “map”. It’s important that you have registered your business. You need to register your business name, establish it as a legal entity, and most importantly obtain an Employer Identification Number (EIN), which is your federal tax identification number. An EIN serves the same purpose as a Social Security Number does for you personally. It’s also what the bureaus will use to recognize your business.
2. Separate Your Accounts
The next step to help boost your credit is to separate your personal transactions and your business transactions. As a business owner, it can be difficult to draw the line between business and personal, especially considering how much of your own self you put into it all. However, your bank account can’t be one of these blurred lines. It’s crucial that you open up a separate bank account. Many times, suppliers will ask for bank references for your business, and it’s important you have these. Some credit bureaus will also evaluate your banking history, so the longer that history is, the better. Not to mention, it’s a great way to ensure your personal spending doesn’t dip into your necessary working capital.
3. Get a Credit Card
The easiest way to start building a credit history is to get a business credit card. As you know, applying for a credit card is extremely easy and, thankfully, all your credit card activity is reported to the bureaus. Be wise in the credit card you choose. Business transactions naturally tend to be larger than personal transactions, so be sure to pick a great rewards card that will allow you to see some benefit from that spending (such as cash back or air miles).
4. Open a Line
Another way to begin populating your credit history is to try to take out a line of credit with a supplier. This can be tricky at the beginning if you don’t have any credit, but it is certainly worth asking. If you don’t have any luck with local suppliers, try some big brands such as Staples, who not only have a greater ability to offer a credit line, but they also report to the credit agencies. In the beginning, when you are taking out a credit line simply to build your history, be sure that the supplier reports payment behavior. Unfortunately, only a small portion of businesses report to the agencies. The bureaus won’t be able to report on your good credit if it hasn’t been reported to them.
5. Pay on Time (or Early)
Remember, you want your credit report to reflect positively on you. Therefore, it’s crucial that the lines of credit you take out are paid promptly. Credit scores reflect your ability to pay on time, so make sure you are paying those credit card bills and invoices on or before the payment due date. Something that is unique in business credit, as well, is acknowledging that a business pays early. Since so many business operate on net terms, if you normally pay your bills early, your credit score will reflect this and get a giant boost. To build excellent credit, it’s pertinent you pay on time, and a plus if you pay early.
Even if you never think your business will need financing, net terms or a credit line, you can’t predict what the future holds. Therefore, it’s important that you start building your business credit today, ensuring your business has a great reputation, and no doors will ever be closed because you’re not on the credit map.
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Meredith Wood is the Director of Community Relations at Funding Gates, an online application for small businesses that allows them to track, organize and manage their accounts receivable all with simple clicks. An avid small business writer, Meredith’s work can be seen on Amex OPEN Forum, Fox Business, AllBusiness and many other small business sites. Connect with Meredith on Twitter @FundingGates.
