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Credit is the ability your business has to borrow money.  Just as with personal credit, it allows your business to buy something now and pay for it later.

arco carbajo

As business credit expert Marco Carbajo notes, good business credit is a business asset:

A tangible business asset is when you purchase vehicles, real estate, computers, office furniture and other fixtures exclusively for business use.

Intangible business asset are nonphysical resources and rights that have value to a business. Some examples are copyrights, trademarks, patents, accounts receivables and you guessed it – business credit.

We’re all familiar with the processes involved with personal credit. When you have loans, credit cards, or other types of credit associated with your personal file, then a credit score is established.

Your score is heavily influenced by the number of accounts you have, how many payments you make on time, and how much available credit you happen to have.

Your credit score updates regularly. Changes are often tracked monthly, though updates may occur daily

The process for establishing business credit relies on the same principles for establishing personal credit.

Why Business Credit is a Good Thing to Have

One of the reasons to establish business credit is that if you’re using personal credit for business needs, then you might be held personally responsible for business expenses that remain unfulfilled.

jill beirne davi

Jill Beirne Davi puts it this way on LearnVest:

A common mistake many business owners make is funding their business expenses through personal lines of credit or personal credit cards, which in some cases makes them financially liable for the business entity’s actions. For example, the owner of a bakery who uses his own funds to buy supplies and pay the rent could be personally liable when he hasn’t paid in three months and creditors come knocking.

When you operate a business, you’ll find that more potential creditors are going to access your personal credit profile if a business profile is not available.

Although the rules have changed regarding these soft inquiries, it does create a lot of junk mail that you may not want.

8 Steps Necessary to Establish Business Credit

Having a credit history for your business that is separate from your personal finances can reduce the negative impact that one may have on the other. You don’t want a poor personal credit score to affect the availability of credit for your small business, or vice-versa.

To establish business credit, you’ll need to follow these 8 steps.

1. You Must Incorporate Your Business.

Many partnerships and sole proprietors attempt to establish business credit without taking this step. Unless the business is incorporated, it will be based on your personal financial history. Forming an LLC is the easiest way to create separation from your personal credit.

2. Obtain an EIN

A tax identification number is required in the United States to establish business credit. The Internal Revenue Service calls this an EIN, or employer identification number.

You cannot operate your business as a corporation without one. You can apply for one online, by fax or mail with Form SS-4, or over the phone if the business is located outside the United States by called (267) 941-1099.

3. Open a Bank Account for Your Business

You will need to have a checking account opened in the legal name of your business.

Then, once the account has been opened, you’ll need to pay your business obligations through that account. Make sure you’re paying any business credit card bills through your new business bank account.

4. Establish a Business Phone Line

It helps to have a separate phone line for your business when creating separation between your personal and business finances.

It can be a business cell line, a VoIP, or even a landline. Just make sure you put the account in the legal name of your business.

5. Open a Credit File

Contact the major credit reporting bureaus to have a credit file opened for your business. In the United States, that means contacting Dun and Bradstreet (D&B), Equifax, and Experian.

6. Apply for Business Credit Cards

If you do not have a business credit card in your possession already, then you’ll want to apply for one. Make sure the line of credit is awarded without a personal guarantee on the debt.

Then make sure the credit card issuer reports information to the credit reporting bureaus.

7. Get a Credit Line with Vendors

Your vendors might be giving you credit already too. If they do, then talk to them about reporting the status of your credit line to the credit reporting bureaus.

With your new business file opened, they can send in your payment history without difficulty.

8. Make Sure You’re Paying Your Bills

If your bills aren’t being paid on time, then your business credit profile is not going to look attractive to financial institutions. It’s that simple.

When you have good business credit, you’ll be able to obtain friendlier credit terms from lenders. Your interest rates are going to be lower because you present a lower overall risk.

That means you can save money and position your company for favorable terms as you look to grow.

What You Need to Know About Business Credit Bureaus

The major credit reporting bureaus cover your entire allowable borrowing histories.

There are actually hundreds of different reporting bureaus that are active. Focus on the major bureaus instead when building business credit as these tend to be the ones lenders prefer.

Your business will receive a different score from each bureau. That happens because each bureau uses its own scoring model to determine your score.

Each bureau will use different information to determine how to calculate your score as well. At TransUnion, a majority of the information which is used to determine your credit score comes from the data you input for your profile.

Unlike personal credit files, your business is not entitled to one free report from each major bureau every year. You’ll be asked to pay a fee to receive your updated credit report.

Because this is a business expense, make sure that you keep your receipts, so you can deduct it properly when tax season rolls around.

Your business credit score will also be different than your personal score. Business credit scores are measured on a 100-point scale, with 0 being the lowest and 100 being perfect.

A minimum credit score of 75 is usually necessary for businesses to be approved for the best possible rates which are currently available.

If there are negative influences on your credit score, the information can stay there for 7 years. That’s why it takes time to improve a credit score after a negative event occurs. That process is also why it takes time to initially establish business credit in the first place.

What If I Don’t Want a Business Credit Card?

Credit cards are one of the fastest ways to establish a credit history for a business. With high interest rates, they may not be the best solution for every business.

If you wish to avoid a credit card for your business, you’ve got two other options to use for credit establishment: loans or a credit line.

You can look for a business loan through a local bank or credit union. You can also apply for business loans through the Small Business Administration.

Take a look at the 7(a) loans available through the SBA. They are guaranteed by the agency, which makes it possible to get better interest rates and repayment terms when you’re first starting out.

You can use the funds from an SBA 7(a) loan for a variety of purposes.

  • Purchasing land.
  • Repairing existing assets.
  • Purchasing a business or expanding one.
  • Refinancing your current business debt.
  • Purchasing new assets, such as furniture, equipment, or supplies.

Most 7(a) loans often offer longer terms and lower down payments when compared to traditional lending products. There are also specific programs available for under-served communities, exporting businesses, and members of the military.

You can also establish a business line of credit with your local bank. This type of product is not quite a loan, but not quite a credit card either.

If approved for a business line of credit, then your bank will agree to lend you a specific monetary amount that is based on your current credit profile.

You are not required to take the funds from the credit line right away in most circumstances. You can have your business tap into the resource whenever it may be needed.

How much you pay on a business line of credit depends on the amount of money you tapped into. It is a good option to consider if your business needs to make a major purchase and you don’t want your personal credit affected by the purchase.

What If a Credit Bureau Says My Business Has No Score?

Most business credit reporting bureaus require a minimum amount of information to be available to generate a score.

If you have not met the established minimums, then you will not have a score generated.

My Business Credit Score Is Bad… Now What?

Maybe the issue you have is a low business credit score. That’s okay. You can build up your credit score over time, no matter how poor the score might be today.

It’s important to remember that your business credit score plays a role in the potential success of your business. It’s more than just a number.

Everyone who works with you on a credit basis uses the score to determine how much risk you represent.

Understanding the basics of your credit score is only one half of the battle you face. Knowing what to do to improve your score is the other half of the battle.

Unfortunately, there is no guaranteed method available to improve a credit score, whether you have bad credit or no credit.

You can take a few proactive steps with your business to make sure your credit score is as good as it can be at any given moment.

The most important thing you can do is to check your business credit reports regularly. Verify that your business information is accurate. If you find errors in this information, report them immediately.

Then make sure that you’re working with companies that will report your financial activities. Make sure you verify that the companies are reporting this information. Not all creditors will report trade information.

It may take up to 60 days for changes to appear on your business credit file.

Then make sure you are paying your creditors on-time, every time. Just one missed payment is enough to drop the credit score for your business.

MyFICO recommends that you get current, then stay current.

“The longer you pay your bills on time after being late, the more your FICO scores should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever.”

If you’re attempting to repair your credit, then you will want to avoid applying for a credit card or line of credit unless it is absolutely necessary.

Do not close your current credit cards or credit lines unless the information on them is generally negative. Closing older accounts may have a detrimental impact on your credit score as well.

Then get your debt balances on all your credit products to 30% or below of your overall limits. A balance under 20% is ideal.

If you’re having trouble remembering to pay your bills on-time each month, try to have payment reminders setup for you. Many creditors offer this feature as part of their credit products. You’ll receive an email, text, or both to remind you that it is time to pay the bills.

Another option to consider is an automatic withdrawal to ensure a payment is never missed. Automatic payments only take the minimum payment due, however, which may not be the right choice for every situation.

What If I Have Had a Collection Account on My Credit?

If your business struggled to pay its bills for more than 90 days, then there may be a collection account on your credit history.

Even if you do not have a formalized credit relationship with a vendor, they may have sent your bill to a collection agency. That agency would’ve then communicated the delinquency to the credit reporting bureaus.

Once a collection account is reported on your credit file, there is no legal obligation for that account to be taken off the file until it has aged off.

That means you could pay off the collection amount, then still be dealing within the consequences of the late payment for years to come.

You do have the option of negotiating with a collection agency regarding how the information is being reported. In many instances, the agency will agree to stop reporting the delinquency in return for a secured payment schedule or a negotiated settlement.

Creditors may agree to stop reporting a delinquency. They cannot guarantee that the delinquency will be removed.

You do have the option to dispute errors that are on your business credit file. If you have had a collection account placed on there, which you paid, then it costs nothing to dispute how it is being reported.

It may lead to the account being removed, which would then have a positive impact on your business credit.

Where Else Can Financing Be Obtained?

Loans and credit cards are not the only way to obtain financing for your business. You may be able to attract investors from a venture capital firm to put some money into your company.

Some investors may want to invest into your company on their own as well.

If you choose venture capital, then you will be choosing equity financing. That means you’ll be giving up some control over your company.

Make sure you are comfortable with the amount of control that has been proposed before signing any type of agreement.

Instead of looking at venture capital, a small business grant may be a better option. There are several options available throughout the U.S. with state development organizations that help new businesses get the money they need.

If you do need a loan for your small business, a local non-profit lender might offer better rates or terms than a traditional lender. You’ll need to apply for funding, just like you would at a bank, while keeping other qualification criteria in mind.

You might also be able to secure some financing from your family and friends. If you pursue this route, then make sure every agreement you make is in writing. Hold everyone to the same standards of accountability. Be transparent about the business relationship and communicate honestly.

As a last resort, you may be able to access funds from your retirement account to begin funding your business. You are permitted to borrow against an IRA or a 401(k) in many instances. You’ll need to pay back those funds or face an early withdrawal penalty in some situations.

What Are the Advantages of Moving to a Business Credit Card?

The primary benefit received when a small business transitions from a personal to a business credit profile is access to immediate capital.

Many business credit cards offer a credit limit of at least $50,000.

That makes it a lot easier to make necessary business purchases than if you were forced to continue using your personal credit profile.

AllBusiness reports that 65% of small businesses now have credit cards and the numbers are continuing to rise.

As with any type of credit, cautious use is what brings out the advantages of this financial tool.

You’ll be able to control employee spending with greater specificity when a business credit card is being used as well. Most card issuers give you the option to set specific limits on each employee card.

There are rewards to think about as well that could extend your purchasing power.

David Boyd, from Credit Card Compare, told Love to Know in an interview that rewards are the key feature to look for with a business credit card.

“If you don’t travel frequently for your business, don’t get a credit card that rewards you with air miles or frequent flyer points.  Instead, look for a card that awards you with points that can be redeemed in stores for useful items.”

Several business credit cards offer 2% cash back on purchases, introductory APR periods, or specific rewards that create discounts on the items you use the most.

You can also use the 21-day or 25-day grace period to have more available cash on-hand if needed.

What Are the Disadvantages of Using Business Credit Cards?

“Don’t ignore the ramifications of not paying on time,” writes The Wall Street Journal in their credit card guide for businesses. “You could face steep charges, a higher interest rate – often approaching 30% – and even put your personal credit score in jeopardy.”

The annual fees on business credit cards are often higher than they are on personal credit cards. In return, you may receive up to 30 days to pay without an interest charge instead of 21 days or 25 days.

Some rewards programs may offer up to 5% in returns.

You would need to make specific purchases in product categories, or at a specific location, to obtain those benefits.

If you make late payments, however, then there are added fees which can add up quickly when the budget for your business is tight. You’ll have the drop in your credit score to deal with when addressing late payments too.

You’ll want to think about availability as well. Visa and MasterCard are accepted in most locations. Discover is accepted a little less often. For purchases outside of the United States, American Express is rarely accepted, so should be considered a domestic option only.

There is the interest associated with the credit card to consider as well. Even though credit cards make it easier to purchase things, you could find yourself paying a base interest rate of 10% or more on your balance.

And finally, there is the issue of having your business credit card stolen.

Although $0 responsibility for fraudulent charges is common, and your liability insurance might cover any other costs, it does take time to restore your business credit file and reverse those charges.

What About a Business Secured Credit Card?

If everything else has failed and you’re still struggling to secure business credit, then a secured credit card might be an option to consider.

With a secured credit card, you are paying the issuer of the card a set amount to create a line of credit.

That means you would pay the credit card issuer $5,000 up front. Then you would receive a credit card with a $5,000 limit on it.

Melanie Lockhart at Credit Karma notes that some of the best secured business credit cards have limits that can be as high as $25,000.

As you use the card, you can work on building your credit history by making on-time payments and demonstrating responsible credit use over time.

The deposit is not always a reflection of your credit line. If you have established some credit, but not enough to access other lending products, then the credit card issuer might ask for a $5,000 deposit to open a $25,000 credit card account.

When the deposit amount is equal to the credit line, the risks to the issuer and the business are greatly reduced.

If you fail to make payments on your outstanding credit balance, then the deposit is used by the issuer to pay off your obligation. Any remaining amount would then be refunded to you if you didn’t want to replace the deposit amount.

Many secured business credit cards will eventually transition to an unsecured credit card over time. This process usually takes 6-18 months, though it could be sooner in some instances.

Even if the credit card is secured with a full deposit, your payment activities should be reported to the credit reporting bureaus. Before applying for this type of credit card, make sure the issuer will report your activities.