At Bankrate, we get a lot of questions about developing business credit, especially from young, up-and-coming entrepreneurs. For example, one fortunate young woman was given a large amount of funding from her parents to launch a startup, but she had never had a credit card or a loan before. All she had was a period as an authorized user on that account. Would that be enough to start a credit file for her business? Yes.
Here’s what she and other emerging business owners should do first when opening a business credit file.
Open a designated deposit account
First, keep your personal and business finances separate to streamline your bookkeeping. Open a checking and savings account with a bank or credit union just for your business and deposit the funds you plan to use.
Having a business checking or savings account designated for deposits can help you organize your accounting and taxes, plus getting a credit account linked to your business allows you to make payments from funds in your deposit account.
Starting as a sole proprietor
Typically, the structure of your business will determine whether or not you need to create a business credit file. Many entrepreneurs start out as sole proprietors and maintain that status throughout the time they own their business.
Starting as a sole proprietorship allows you to determine whether you need the additional protections and other elements that come with different business forms. If you decide to remain a sole proprietor, it means that there is no legal difference between you and your business. In that case, your consumer credit file will also help your business.
When you apply for a business credit product, lenders will check your credit reports from Equifax, TransUnion and Experian, and the resulting credit score will determine your eligibility and set your terms.
If you have credit cards or other credit products in your name, you have a consumer credit file. But even if you don’t, you might already have a consumer credit file. For example, you might be an authorized user on someone else’s credit card, or you might have a student loan or car loan. To find out, visit the government site annualcreditreport.com and order a free weekly credit report to review it.
If you have a consumer credit file, you likely also have a credit score, such as a FICO score or VantageScores, so be sure to check those too. Scores range from 300 to 850, with higher numbers being preferable to prospective creditors because they indicate a lower credit risk.
Apply for a business credit card
Once you know your credit situation, you can apply for the right credit products in your own name. While you might think that a personal card that you use only for business will suffice, you might actually be better off with a small business credit card that you never use for personal expenses. These cards offer a wealth of benefits that are customized to the needs of entrepreneurs and small business owners.
There are a huge number of business cards on the market, and as long as you are earning an income independently, you can apply for a business credit card. Please note that applying for a business credit card requires you to prepare more information than a personal credit card. You may need to state your company name, industry, and company income amount. Compare the perks and benefits of each card, as well as the credit requirements, before completing the application.
If you don’t qualify for an unsecured business credit card, consider a secured business credit card. A line of credit is usually the same as a deposit, so if you put $500 down, that’s your billing limit. If you use it regularly and responsibly, it will help raise your credit score and allow you to later qualify for or move up the ladder to unsecured credit products.
With this strategy, you don’t necessarily have to establish business credit before applying for a card; lenders can make their decision based on your consumer credit profile. Once you have a business credit card, you can start building your business credit by using it responsibly. There’s nothing you can do other than keep all your accounts in good standing by making payments on time and keeping your credit utilization ratio low. Keep in mind that what you do with these business credit cards may affect your personal credit.
Move to a business credit file when you’re ready
If your company is incorporated or will be transitioning as a separate legal entity such as a limited liability company (LLC), partnership, or corporation, you should start creating a business credit file if you haven’t already. More information on how to create a business credit file is provided below.
In addition to a designated business bank account, you will need to obtain an Employer Identification Number and a separate business phone number from the IRS.
Also, apply for a DUNS number, which is a nine-digit number associated with your business that helps build a credit history for your business.
Commercial credit reports are generated by Dun & Bradstreet, Experian Business, and Equifax Business and contain information only about your company’s credit products and operations. Please note that if you have business loans or other entities have financial transactions with your company, you may already have a business credit file. Please check before opening a duplicate credit file.
If you have any credit products such as business loans or credit cards in your company’s name, lenders will send those activities to commercial credit reporting agencies, which then become part of your business credit file.
It’s important to note that while only businesses with legitimate business purposes can obtain consumer credit reports, business credit reports are public and can be viewed by anyone.
Your business credit report will include:
- Business Identification and Mailing Address
- Business Structure and Partnerships and Subsidiaries
- Financial data about your business
- Credit card, loan and collection history related to your business
- If your supplier allows you to “buy now, pay later,” then you are on credit.
- Any liens, judgments, or bankruptcies related to your business
As with consumer credit reports, the information in these reports is scored and that risk score is also included in your business file. To build healthy business credit, make paying your debts on time a priority, as some scoring models only use payment history as a factor. There are many different types of business credit scores, most of which range from 0 to 100, but the FICO Small Business Scoring Service (FICO SBSS) ranges from 0 to 300.
Borrow and repay the right way
No matter what kind of credit card you get, treat your account with care.
- Make all payments on time. All lenders want to ensure that borrowers meet the terms of their contract, most importantly, making payments on time.
- Be careful about how much you borrow. You don’t want to end up in excessive debt and end up suffering from high payments and expensive interest.
- If you are in trouble, contact your lender. Every business goes through tough times. You may find yourself in a situation where your bills are due and you don’t have the income to pay them. If this happens, contact your credit issuers and ask for help before you fall behind on your payments.
Remember, all of your credit accounts go on your file, whether it’s a consumer or business credit report. That information will be important to other lenders and vendors with whom you may want to do business. So everything on your report should have a positive impact on you and your company’s health.
And if a young entrepreneur doesn’t have the advantage of the cash inflow that their parents had, try opening a savings account that you can tap into when business problems arise. You’ll be glad you did.
Conclusion
Opening a credit file for a new business doesn’t have to be a complicated process, and in some cases, it’s not even necessary. If you’re a sole proprietor, you probably won’t need to do this, but if your business is structured in a different way, such as an LLC, you’ll need this step to show potential lenders that your business is healthy.
Once you have an EIN and a designated business account, you can begin working with a business loan provider who will provide the information for your business credit file, but remember to handle your debt responsibly by making payments on time and never borrowing more than you can repay.
