Many business owners don’t realize that there is even a question of how to build good business credit?  They think that business credit works similar to personal credit. Since business personal credit builds passively by simply with handling credit wisely, they think business credit does the same.  That isn’t the case however. The answer to “How to build good business credit?”can be summed up in one word, intentionally. You must make it a point to build business credit. You have to make it happen. 

How to Build Good Business Credit: Fill Your Cornucopia with Business Accounts

In traditional Thanksgiving Day pictures, you see the ever overflowing horn of plenty known as the cornucopia.  There are breads, fruits, vegetables and nuts pouring out of the horn shaped basket. If you are a business owner, you need two cornucopias.  One is for your business credit, and one is for your personal credit. While you want them both overflowing with healthy accounts, what happens with many is that the business credit one is empty or non-existent.  They think it is there and full, while in reality all the accounts they think are hitting their business credit report are actually hitting their personal report. 

Why Do you Need Two Cornucopias? Does Business Credit Even Matter? 

If you’re wondering why it is important to know how to build good business credit, here is your answer.  The business credit cornucopia can hold more. Let me explain. If you try to run a business with only what is in your personal credit cornucopia, you will not have enough. You will need more than what it can hold. 

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Here is what that looks like in real life.  Your personal credit cards are going to have lower limits than what business credit cards have.  Business expenses are, by nature, a lot higher than personal expenses. Therefore, if you try to put business and personal expenses on the same credit cards, you are going to overrun your limits.  

Even if you make your payments on time, or even pay off your balances each month, you are likely going to keep hovering near your limits.  Not only does this reduce the funding you have available, but it can also have a negative impact on your personal credit score. Here’s how.  The closer your balances are to your limit, the higher your debt-to-credit ratio is. A high debt-to-credit ratio has a negative impact on your credit score. 

So, this means you need to ask how to build good business credit for two reasons.  First, you may not have enough credit availability to run your business successfully without it.  Second, if you do not build business credit, you could end up ruining your personal credit. Consequently, not only would your business success be in question, but you could lose the ability to do things like buy a house or a car. 

Where Does that Second Cornucopia Come From?

Here is what most business owners do not understand.  You have to intentionally go out and get that separate business cornucopia.  If you don’t, then any business accounts you open will just go straight to your personal credit cornucopia and wreak the havoc mentioned above. So, how do you do that?  How do you establish business credit in the first place so that business accounts report to that, and not to your personal credit? The key is to make your business appear to lenders as a fundable entity, separate from yourself as the owner. 

How to Build Good Business Credit: Establishing Fundability

The first thing you need to know is, it is easiest to do this as you are establishing your business.  If you are a new business owner just getting started, then set your business up this way on the front end so that you can begin building business credit now. If, however, you are already up and running, it isn’t too late.  You may have to do some backtracking, but it will be so worth it. Either way, this is what has to be done. This is the first part of the answer to the question of how to build business credit. 

Separate Name and Contact Information

This is an essential first step to weaving a separate business credit cornucopia.  Of course, most businesses do not have the exact same name as their owners. The key is, you have to list the business in the business directories under that business name.  In addition, it needs to be listed with its own address and phone number. 

A question often asked about this is, how do you get a separate business phone number and address if you run your business out of your home or online.  Actually, there are several options now for a business telephone number that do not even require you to have a second phone. You can just have your business number forwarded to your personal line. 

As for an address, there are a number of virtual office companies that offer a physical mailing address to businesses for just this purpose.  Typically, they also offer a number of other useful services such as meeting spaces and live receptionist services. 

Get and EIN

When you apply for credit, they always ask for you Social Security Number, or SSN.  If you are applying for credit in your business name, you shouldn’t use your SSN. If you do, that account will automatically relate to your personal credit.  The way around this is to get your business an EIN.  They are free on the IRS website.  You may still need to use your SSN for identification purposes when applying for credit under new fraud regulations, but that needs to be the only reason you use it. 

You Must Incorporate

This isn’t an option.  While it is much easier and cheaper to operate as a sole proprietorship or partnership, you cannot get the separation needed if you do not formally incorporate.  Whether you choose an S-corp, LLC, or corporations will depend on your other needs and budget. Any of them will work for establishing fundability. Still, you must choose one. 

Get a Business Bank Account

When building fundability, you need to have a separate business bank account.  This serves a number of purposes. First, separate from building fundability, this helps you keep your business and personal expenses separate.  That will be a tremendous help come tax time. 

Secondly, some business credit cards want to see a business bank account with a minimum average balance before they will approve credit.  Lastly, it helps lend credibility to the fact that your business is a fundable entity on its own, apart from the owner.

Professional Website and Dedicated Email 

In today’s business world, if you do not have an online presence you do not exist.  Having a poorly executed online presence is just as bad. You need a professionally built, working website.  Pay for design and hosting. The free services are not going to be good enough to help you out here. In addition, you need a dedicated business email address with the same URL as your website.  Free email platforms such as Yahoo and Gmail do not look professional.

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Get a D-U-N-S Number

There are several business credit reporting agencies, or CRAs.  The 3 most commonly used are Dun & Bradstreet, Experian, and Equifax.  Of those three, Dun & Bradstreet is definitely the largest and most commonly used.  Before you can have a credit profile with them, you must have a D-U-N-S number.  This is how they identify your business.  

If you do not have a D-U-N-S number, you will not have a credit profile with Dun & Bradstreet, so you definitely need the number.  That’s all you need though. They will try to upsell you on other services, but stay strong and resist. You just need the number, and it’s free. 

How to Build Good Business Credit: Fill the Cornucopia

Once you have your separate business credit cornucopia, it’s time to fill it with lots of yummy accounts to build your business credit big and strong.  That, again, takes intentionality. You cannot just go out and start applying for credit in your business name. It won’t happen. Just as those that celebrated the first Thanksgiving Day had to actively work to provide the food for the feast, so you will have to actively build business credit. To do this, you have to work through the business credit tiers.  

Starting at the bottom tier, you build enough accounts and business credit to move up to the next tier, until you reach the top.  Here is a little more about each tier and what it takes to move on to the next. 

How to Build Good Business Credit Using The Vendor Credit Tier

This is the first tier on your journey to fill your business credit report with accounts.  It consists of starter vendors. These are vendors that will offer your business net terms on invoices without first checking your credit.  Then, when you pay, they will report those payments to the CRAs. This is the second part of the answer to how to build good business credit.  In this way, you can begin to build credit without having credit. 

They will look at other information however.  Some like to see a certain amount of time in business.  Some will want you to place an initial order, or more than one, before they will extend net terms.  Others will want to see a business bank account with a minimum balance. Another thing they sometimes look at is a listing in the business directories.  Starter vendors may require any combinations of these things. Find out more about some of the most common starter vendors here. 

How to Build Good Business Credit With The Retail Credit Tier

After you have 8 or 10 accounts from the vendor credit tier reporting positive payment information to the CRAs, you can apply for credit in the retail credit tier.  These are those cards that you can only use at the specific retail store that issues them. For example, Office Depot cards that you can only use at office depot are in this tier.. 

How to Build Good Business Credit: Continuing to The Fleet Credit Tier

After you have enough accounts reporting from the retail credit tier, you can apply for cards in the fleet credit tier.  These are cards that you can only use for fuel costs and automobile repair and maintenance. Fuelman and Shell are examples of companies that issue cards in this tier. 

How to Build Good Business Credit: Finishing with The Cash Credit Tier

This is the top credit tier.  It’s the goal. Once you have enough accounts reporting from the fleet credit tier you can apply for cards in this tier.  It consists of the standard Mastercard, Visa, Discover, and American Express cards that are not limited to a specific store or type of expense.  

How to Build Good Business Credit: Don’t Let Things Start Falling Out

Even though the overflowing cornucopia makes for a pretty Thanksgiving Day picture, you don’t really want the same effect with your business credit.  If you do not handle the credit you have properly, you’ll start losing control. Be sure to pay accounts on-time. Remember, don’t buy things you cannot afford just to build business credit.  You will end up with the opposite of what you want. Also, be sure you keep an eye on things. You wouldn’t want a bug eating up all that good food in your horn of plenty right? 

Monitor your business credit regularly to ensure there are no mistakes and that everything is up to date.  We can help you with that here.

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How to Build Good Business Credit: May Your Cornucopia Be Full

I think it’s clear at this point.  It takes more than just paying your bills on time to build business credit.  Unlike your personal credit score, your business credit score does not appear passively.  You have to work to intentionally build it. It isn’t a hard process, but it is a process. You have to trust the process and act responsibly.  Now that you know how to build good business credit, it’s time to get started.

 

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