May 1, 2023

How to build business credit

With Firstbase since:

Business finance is one of the most daunting aspects of starting a new company from scratch, especially for first-time entrepreneurs. The way you manage your company’s finances is one of the most important factors for your long-term results.

Business credit is a vital tool when it comes to building a successful and financially sound business. Building your business credit will help you open up new financing opportunities and put your company in a position to succeed.

In this article, we’ll discuss what business credit is, why it matters, and share some strategies for improving your business credit.  

What is business credit?

Business credit is the creditworthiness of your business entity or company.

You know that creditors view your personal history when you apply for a loan, credit card, or other type of credit. Similarly, business credit impacts the ability of a business entity to obtain loans and other kinds of financing.

In short, business credit is a measure of the financial health and reliability of your business.

While personal credit scores are conventionally measured on a scale of 300-850, there are several different methods of assessing business credit. Different creditors may use different scores to determine your creditworthiness.

The most widely recognized sources of business credit reports are Equifax, Experian, and Dun & Bradstreet.

An Equifax small business credit report includes several unique figures such as a credit risk score and a payment index.

Experian provides a unified credit score on a scale of 1-100. It also groups companies into “risk classes” from 1 to 5.

Dun & Bradstreet has the most complex reports, offering a total of four scores representing viability, failure risk, late payment risk, and past payment history.

With so many different ways of measuring business risk, there’s no single way to game the system. As a business owner, you should focus on making on-time payments and improving your company’s overall financial health. We’ll cover business credit strategies in more detail in a later section.

Why is business credit important? 

It’s much harder to grow and expand your company without the help of business credit. 

Good business credit can benefit business owners in several ways:

  • Lower interest rates: Strong credit is a bargaining tool. A high business credit score is proof that your business is trustworthy and that you take your finances seriously. This can lead to lower interest rates from creditors.
  • Better payment terms: In the same way, a higher level of trustworthiness means better terms for your business. This could take the form of longer payment plans, more varied financing options, or access to more money than you could get with a lower credit score.
  • Competitive advantages: Getting more favorable business financing terms will save you a significant amount of money over time. In turn, those savings will give you the opportunity to offer lower prices, reinvest in the company, or generate other key competitive advantages.

How can I build business credit? 

Now that you know why business credit matters, here are seven steps — in chronological order — that you can take to help build it.

  1. Incorporate your business: Incorporating your business will give you more credibility and allow you to start building company credit history. Click here to incorporate your LLC or C Corp today.
  2. Obtain a federal tax ID number (or EIN): After incorporating, you’ll receive an EIN from the IRS. This number acts as your company’s tax ID, and you’ll need it to apply for business credit.
  3. Open a business bank account: This step further separates your business finances from your personal finances. It will also streamline your accounting processes and make it easier to file business taxes.
  4. Apply for a business credit card: Once you receive a business credit card, you can start building a credit history by using it for regular business expenses. Over time, this will help increase your business credit score.
  5. Be sure to pay your bills on time: Of course, you won’t be able to build credit if you regularly miss payments. As with a personal credit card, you should only use your business credit card to cover expenses that you can pay off before accruing interest.
  6. Maintain a low debt-to-credit ratio: Your debt-to-credit ratio represents the amount of credit you’re using relative to the total credit limit. For example, if you have a balance of $6,000 on a credit card with a $10,000 limit, your debt-to-credit ratio would be 60%. According to Equifax, lenders prefer to work with companies that have a debt-to-credit ratio of 30% or less.
  7. Keep tabs on your credit score: You should regularly review your business credit reports to understand where your credit is trending and what you can do to maximize your scores. You can also report any inaccurate or outdated information and remove it from your credit history.

Final thoughts 

Building business credit takes some time, but it’s worth the effort. It’s a vital piece of the puzzle as you grow your business and work toward reaching your long-term goals. 

Ready to get started? Firstbase makes incorporation easy, helping founders create LLCs and C Corps in a total of 43 states. Hit the link below to incorporate your company and begin building business credit.

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