How to Build Credit For Your New Business

Starting a business isn’t for the faint of heart and a positive cash flow and the ability to build credit is vital to keeping your venture afloat.

While individual savings can be tapped, many entrepreneurs prefer to borrow the money that’s necessary to help transform their idea into a reality. Putting your personal credit on the line can be risky and you may be better off establishing a separate credit profile for your business.

Here are some steps to help build credit as a business owner:

Lay the groundwork to build credit

When you operate as a sole proprietor, there’s no legal distinction between yourself and your company. That means that any assets or liabilities that are attached to the business are shared by you personally.

Incorporating allows you to distinguish your business as an entirely different entity. After you’ve incorporated, you can apply for a federal Employer Identification Number that you can use to set up a business bank account.

Once you’ve got that covered, the next step is to establish a credit file for your business with the key reporting agencies so you can build credit as a business.

Unlike your personal history, any credit transactions made in your business’ name aren’t automatically reported unless you’re registered with the appropriate credit bureaus. Dun & Bradstreet, Equifax, TransUnion and Experian all offer these services. There’s usually a fee that goes along with getting registered but it should be tax-deductible.

Begin to build credit with supplier credit

It’s not enough to have a credit profile in your business’ name; there has to be something to report. Opening lines of credit with suppliers or vendors is a relatively easy way to get the ball rolling and build credit.

Generally, the approval process for supplier credit isn’t as strenuous as it would be for a bank loan. It’s designed to be a short-term source of funding and invoices are typically due within 30, 60 or 90 days.

If you’re planning to go this route to build credit, you need to make sure your supplier is reporting your activity to the business credit bureaus you’re registered with. Otherwise, it won’t have an impact on your credit history.

When dealing with suppliers, avoid taking on more credit than you can reasonably afford and always pay your invoices on time. Late or missed payments will work against you just as they would on your personal credit report.

Open a business credit card

Using a business credit card to pay for everyday expenses or finance a larger purchase is another smart way to build your payment history and build credit. Many of them also offer rewards programs that allow you to earn cash back or points that can save you some money in the long run.

When you’re shopping for a business credit card, there are several things you want to pay attention to. First, you need to be clear about how rewards are structured. Some cards, for example, may allow you to earn cash back on everything you spend while others may limit rewards to certain types of purchases. You should also look at how and when rewards can be redeemed.

Next, consider the card’s credit limit. Business cards can offer lines of credit ranging from $5,000 to as much as $50,000. If you’re trying to snag a card with a higher limit, you may not have much luck if your credit profile is still on the skimpy side. Finally, look at the card’s interest rate and the fees to determine how much the credit is actually going to cost you.

Look into a business loan to build credit

Qualifying for a loan when your business is still in its infancy is often difficult and lenders may put your application under extra scrutiny.

Specifically, banks will take a close look at your business credit history to look for things like late payments and existing liabilities. If your credit file is on the thin side, then they’ll also want to run through your personal credit history to see how well you’re able to manage money.

Applying for a loan with the bank you opened your business account with is a good starting point to build credit. A quick glance at your balances can tell the loan officer if you’ve got enough cash socked away to offer as collateral.

If your venture is relatively new, you’ll likely be asked to offer a personal guarantee before your application is approved. This effectively makes you personally responsible for the repayment of the loan if the business defaults so you should consider it carefully before you agree.

If you’re not able to score a traditional business loan, there are some alternatives that may put less weight on your credit. Crowd funding and peer to peer lending platforms are worth considering if you need to borrow a relatively small amount. Just keep in mind that while some organizations, like Prosper, will report the loan to the credit bureaus, there are others that may not.

Monitor credit profiles

Even though your personal credit doesn’t directly impact the information contained in your business credit report you can’t afford to let it take a hit.

At some point, it may be used by a lender to verify your information or evaluate your credit-worthiness for a business loan or line of credit. Paying all of your bills on time, keeping your balances low and limiting the number of inquiries for new credit can minimize the risk for negative marks to appear.

Check your business and personal credit histories at least once a year to make sure all of your accounts are being reported properly. If you see any mistakes or inaccuracies, you should waste no time in disputing the information with the reporting bureau.

You don’t want to find out that there’s a glaring error on one of your accounts when you’re in the process of applying for a business loan.