Small businesses and medium-sized companies (SMBs) will benefit from taking steps to establish and build business credit as quickly as possible. If done right, this relatively quick process could launch soon and begin establishing business credit within months.
What is Business Credit?
Business credit is the ability to receive bank loans or lines of credit and purchase products and services with payment terms such as net 30 days. Business credit is offered to approved companies by vendors and suppliers, financial institution lenders on loans that may be backed by the SBA, business credit cards, and alternative lenders. A business credit score reports payment risk.
Types of Financing Used by Small Businesses
Besides non-interest vendor financing, the SBA FAQs show that small businesses get financing from small business loans, finance companies, fintech companies, angel capital, and venture capital. Owners also use their own capital, personal credit cards, and capital from friends and family to start small businesses. If you’ve used personal credit cards for business, consider switching to business credit cards as soon as possible.
13 Ways to More Quickly Build Business Credit
Check out these top-rated ways for SMBs to build business credit:
- Establish and register a legal entity for the business name through an attorney
- Set up a business phone number and address
- Apply for an EIN (Employer Identification Number) from the IRS
- Apply for a DUNS number from Dun & Bradstreet
- Raise venture capital equity funding if your company has hypergrowth potential
- Apply for net 30, net 45, or net 60 vendor accounts from vendors that report credit and payments history
- Apply for business credit cards
- Make timely payments
- Consider factoring your customer invoices for earlier receipt of payments
- Use strategic finance and updated forecasts and budgets to improve cash flow
- Monitor your business credit reports
- Optimize the business owner’s personal credit score
- Apply for an SBA loan or bank line of credit
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1 – Establish and Register a Legal Business Entity
Consult an attorney and CPA to help your new business establish a legal entity and register it with the Secretary of State in your state. Some corporations and other legal entities such as Limited Partners (LP), Limited Liability Corporations (LLC), and General Partnerships (GP) choose to be incorporated or formed in the state of Delaware. These new business entities are formed with the Delaware Division of Corporations, following their how-to instructions.
2 – Set up the Business Phone Number and Address
For a business address, you may use a physical address or a P.O. Box, according to Legal Zoom. Preferably your primary business phone number is listed in a phone directory.
3 – Apply for an EIN from the IRS
The Internal Revenue Service (IRS) lets you apply online for an Employer Identification Number (EIN). The EIN will be a taxpayer identification number (TIN) used for matching verification to identify a taxpayer, avoiding fraud, and for filing income tax returns. Sole proprietorships may choose to use either an EIN or a Social Security Number to report business income using an individual tax return Form 1040.
4 – Apply for a DUNS Number
Dun & Bradstreet is the only business credit reporting agency that requires a new business to request an identifying number. D&B calls it a DUNS number. DUNS is an acronym that means data universal numbering system. A unique DUNS number is used for tracking and reporting business credit data for your company. It also establishes relationships between related corporations.
When you apply for credit payment terms with a vendor or supplier, you may need to furnish your DUNS number.
5 – Optimally Raise Venture Capital
Hypergrowth companies with hockey stick revenue growth projections may be able to access angel capital or venture capital. When your company has some initial money to spend, it’s more likely to be able to pay bills on time. Paying bills on time establishes positive credit scores through good payment history and control of outstanding balances owed as payables.
6 – Apply for Vendor Credit Accounts
Vendors and suppliers offer net 30 accounts, net 45 invoice terms, net 60 vendor accounts, or rarely net 90 payment terms for approved companies submitting credit account applications. Some of these suppliers are particularly good at helping new companies establish business credit. They report positive credit history to credit reporting bureaus, not just negative payment history.
Some of the easy vendor credit account providers require an annual fee for membership.
Using trade credit is a particularly good strategy for building business credit because vendors don’t charge interest when their customers pay on time. Suppliers often let customers choose to take early payment discounts like 2/10 net 30 when they pay an invoice within 10 days instead of 30 days. These early payment discounts can significantly lower inventory and other costs.
7 – Apply for Business Credit Cards
Applying for small business credit cards (with a line of credit) is a very good way to build business credit quickly and separate business expenses from personal expenses. Some business credit cards require a small business owner’s personal guarantee if the business hasn’t been operating for a minimum number of years.
But limit your business purchases and balance outstanding on some business credit cards to prevent significantly lowering your personal credit score. A lower personal credit score could adversely affect your personal finances.
A business credit card may affect your personal credit score, beginning with the hard inquiry from the application, according to Bankrate.com. And some credit card issuers report business credit card activity to both business credit bureaus and consumer credit bureaus, which means your personal credit utilization ratio ( at a 30 percent FICO weighting) would include those business credit transactions.
Some credit card providers issue employee cards that establish their credit limits for spend management and monitor the cardholders’ purchases through online transactions and statements for monthly billing cycles. Employees use these cards for making small repetitive purchases like office supplies, categorized as tail spend or maverick spend.
Certain business credit cards, including virtual cards, offer cash-back rewards or rebates.
8 – Make Timely Payments
Making timely payments to suppliers and lenders is a cornerstone of building excellent business credit and showing business creditworthiness.
To enable your business to make timely business payments, consider the power of U.S. ACH debit vs ACH credit in addition to credit cards. An ACH is a bank account to bank account transfer. Most companies use their business checking account.
If you can automate repetitive collections from U.S.-based customers via ACH bank transfers (or equivalent global ACH for international customers) and automate your payments to the extent possible using ACH, you’ll save time and money on transactions.
AP automation software can help your business:
- Establish good communications with vendors
- Speed up invoice processing and payments
- Reduce costly fraud and payment errors to conserve cash
- Use a choice of preferred payment methods, including ACH
- Process supplier invoices in time to earn early payment discounts
- Reduce the need for new hire costs
QuickBooks is accounting software used mostly by startups and small businesses. QuickBooks Payments is available through the QuickBooks software for approved businesses. QuickBooks Payments is for making business credit card and debit card payments, wire transfers, and ACH processing.
QuickBooks Payments is linked to a designated business bank account called a merchant account. Fixed and percentage of transaction fees apply. QuickBooks credit card processing payment options may include PayPal and Apple Pay.
AP automation software like Tipalti integrates directly with QuickBooks software to add efficiency, fraud and error control, and regulatory compliance when your business is processing invoices and making global payments.
9 – Consider Factoring Customer Invoices
- No business credit score inquiries are required for invoice factoring, so your credit score isn’t lowered for an inquiry.
- You receive advance payments on invoices quickly upon order shipment to customers or completion of orders. This improves your business cash flow, letting you make timely or early payments.
- Your business credibility increases with a high credit score.
10 – Use Strategic Finance and Rolling Budgets
In good economic times or when you’re dealing with macroeconomic headwinds, using updated rolling forecasts and short-term budgets will help you keep costs under control through better spend management.
Implement company-wide advanced software systems with automation, AI/ML, and when applicable, IoT(Internet of Things) technology. Eliminate manual tasks, increase business efficiency, and provide more business intelligence and communications, including automated exceptions notifications and workflows.
Spend more financial analysis time on finding ways to improve business results beyond preparing financial statements. Your company needs a strategic CFO as a valuable resource to the CEO, finance department, and executive management team.
11 – Monitor Your Business Credit Reports
Monitor your business credit reports and scores with the three primary business credit bureaus, which are Dun & Bradstreet, Equifax, and Experian. Creditsafe is a global credit bureau with operations in the U.S. that you should also monitor.
Business credit scores range from 1 to 100, which is a different scale than personal credit scores which range from 300 to 850. Dun & Bradstreet calls the dollar-weighted payments history score (ranging between 1 and 100) a PAYDEX Score. A high PAYDEX score shows the greater ability of a business to pay amounts owed on time.
When you monitor your business credit profile, you’ll be able to investigate and report any incorrect information in your business credit file. That wrong information could result in a bad credit score. You’ll know your credit scores and progress in building business credit. Work to improve these credit scores over time.
12 – Optimize the Business Owner’s Personal Credit Score
Sometimes when establishing small business credit, both business credit score and personal credit history, including the score matter. For new business credit, Some suppliers may request a business owner’s personal credit score through a credit inquiry. But other suppliers will not request this information.
Remember the relationship between using some business credit cards and personal credit scores, as described above.
SBA loans may be approved based on personal credit and personal guarantees.
13 – Apply for an SBA Loan or Bank Line of Credit
The U.S. Small Business Administration guarantees some SBA loans. Your company interviews competing lenders, compares terms and interest rates, and applies for an SBA loan through local approved lenders. You can find these local lenders through Lender Match on the SBA website.
After the two-day matching process to match your business to interested lenders, you’ll apply for a loan. Some lenders will require collateral or personal guarantees to approve a loan. The lenders will consider credit scores to evaluate credit risk and set interest rates for your business loan.
According to the SBA, as stated on its Lender Match page, preparation for an SBA loan application includes:
- A business plan
- How much capital your business needs and how it would use the funds
- Financial projections showing the ability to repay the loan
- Collateral you’re willing to provide (personal assets and business inventory)
- Industry expertise
If you apply for a bank line of credit with your existing bank or other lenders with a physical presence in your geographic area, get to know your potential lending officer and establish relationships. When lenders know your business capabilities, you may be able to increase your business credit line or get a new loan when the timing is right and your credit or collateral is adequate.
Perks of Good Business Credit
With good business credit, companies can gain advantages. They may receive business credit card perks. With better business credit, you’ll receive lower interest rates on loans. Insurance rates will be lower. Vendors may offer better payment terms and discounts to lower purchase costs. Your company won’t need to pay for products upon receipt with COD (cash on delivery) or before shipment.
Although new companies may need to give personal guarantees for Small Business Administration (SBA) loans, as your business gains profitability, you may be able to obtain business lines of credit and loans not requiring personal guarantees.
Your company builds good business credit by paying vendors on time and having its payment history reported to business credit bureaus, including Dun & Bradstreet, Equifax, and Experian.
In contrast, with past-due payments, your company may have its shipments cut off due to non-payment at some point in time. Your business payment history will be substandard.
Building good business credit results in certainty about inventory shipments continuing and being able to take early payment discounts when cash flow is sufficient. Early payment discounts are a very lucrative way to reduce costs, amounting to an annualized 36.7% rate for 2/10 net 30 invoice payment terms.
Importance of Business Credit for Your Small Business
The availability of small business credit and cash separate healthy companies from those at risk of bankruptcy. To become a vital company, begin establishing business credit early and continue to build credit through prompt invoice and business credit card payments, and loan repayments.
Companies with good business credit and a prompt payment history optimize supplier relationship management. With good supplier relationships, your company can negotiate better terms from vendors and keep them happy. Better vendor terms mean lower costs, better discounts, or longer terms to repay invoices, improving business cash flow.
Network with trade associations in your industry and community to find other ways to build business credit, based on their experience.
You’ll need more than good luck to build business credit. It takes fiscal discipline, continuous improvement, and perseverance. To improve your luck and success, think of your own ideas for a 14th and 15th strategy to establish and improve your business credit in your industry.