Last week, we had an awesome conversation about how you can get business capital and other funding alternatives for your startup. I thought a great follow-up would be to have a quick and simple conversation about how you can establish and build business credit. Click below to view the video or keep scrolling to read more.
WHY ESTABLISH BUSINESS CREDIT?
Business credit is key to receiving the funding you need for your business to go to the next level. The primary reason for establishing business credit is to separate your business credit identity from your personal credit identity. This plays a role in your debt to income ratio, which is a deciding factor when distributing funding. Having excellent business credit is a great way to ensure your funding approval, as well as receive the best rates and favorable terms from lenders.
HOW TO ESTABLISH BUSINESS CREDIT
As we know, credit and cash are the lifelines of business development. It is important to have access to funding especially when embarking on a large endeavor. An important avenue towards ample funding is establishing credit and using traditional or non-traditional ways of gaining capital. If you are looking to establish and maintain business credit, here is how you get started.
Legitimize Your Business
The first step towards establishing business credit is to incorporate your business. It is extremely important for your business to have articles of incorporation, which are filed with your Secretary of State. This is one of the first things used to legitimize your business, and is necessary for business credit eligibility.
Employment Identification Number
Your business will need a Federal Employment Identification Number (EIN), which is easily attained through IRS.gov. This application process is FREE of charge through the IRS, so be careful to avoid third party sites that may request a fee. The process is quick and painless, and your EIN is typically generated immediately.
Business Bank Account
A business bank account is vital for lenders who are looking to confirm the legitimacy of your business. It is a way to establish a footprint for your business and to keep your personal and business finances separate. Regardless of the amount of revenue you bring in, having an open bank account that is current without NSF fees, and is used consistently will help you establish business credit.
Business Address and Phone Line
A simple thing some of us would not think of is establishing a separate phone line and address that is dedicated to your business. There are plenty of phone services for businesses that have very low rates, as well as alternatives for individuals who may still be in the stage of working remotely. Some alternatives include researching shared work spaces and inquiring about programs that allow you to pay a nominal fee each month to have an address listed for your business. Also, UPS offers an option for small businesses to utilize a physical address opposed to a P.O. Box. If you do have an office or an establishment where you are physically doing business, be sure to use the same address for all business related transactions to avoid confusion.
DUNS Number
Getting a DUNS number is a very simple process, and is free to do. Visit the DUN and Bradstreet website and register your business. Upon registering, they will immediately give you a DUNS number. This number serves as an identifier for business credit bureaus and helps to establish that business footprint we previously spoke about.
Business Trade-lines
One reputable company that can be used to help establish business credit, is NAV. For a monthly fee, this company allows you to review your business credit, review your rating with major credit bureaus, and view funding recommendations. The cool thing about NAV is that they report your monthly payments to credit bureaus, which in turn helps to build your business credit.
BUILDING BUSINESS CREDIT
Now that we've taken all of the foundational steps necessary for establishing business credit, we’ll dive into tools used to responsibly build up that credit.
Credit Cards
One of the first ways you can build business credit is by using a credit card. There are several different credit card options out there, including using a gas card, or using a traditional credit card for business expenses. If you are a startup company, it is likely your approval and credit limit will be based on your personal credit and debt-to-income ratio. Don't be discouraged by this! As long as you're using the credit card for your business expenses and paying it off at the end of the month, you will quickly see your credit card limit continue to increase over time. This information will be reported monthly to the credit bureaus, providing a positive impact on the development of your business credit.
Supplier Credit
Supplier credit comes into place when you have established net 30 or net 60 terms with companies providing goods or services for your business. Net 30 or net 60 accounts allow you to pay a merchant’s invoice within 30 or 60 days of receiving goods. These accounts can be used for office supplies, or any type of product provided on a monthly basis, to help demonstrate responsibility as it relates to paying off bills.
Service Credit
Service credit relates to monthly payments for things like your business telephone line, internet, utilities, leasing costs for your workspace, or even costs associated with a company vehicle. The key is to be sure that you are paying those bills regularly and consistently, and in doing so, you should see that your credit is continuing to increase, which is awesome for your ability to get capital for your business.
STAY CONNECTED
I encourage you to stay motivated; you are right where you need to be as it relates to your business. Take it one step at a time and I guarantee you’ll come out a winner in the end! If you have any questions for us, you are more than welcome to drop them in the comments below, or contact us to schedule a 30-minute consultation for a deep dive into your business needs.