As an individual, you monitor your credit and build it to make yourself eligible for better loans when the time comes. Just like you, businesses have credit that can have an effect on loans and purchasing power further down the road. If you’re ready to ensure your business is set up for financial success, consider these pointers to start on the right foot.
Incorporate your business
If you want your business to develop a credit rating independent of your personal one, you need to turn it into a corporation or LLC (Limited Liability Company). Since you are liable for all debts as a sole proprietorship or partnership owner, your personal credit scores determine whether your business will get credit. By establishing a corporation instead, your organization becomes an entity of its own that can build a credit history. Once your enterprise is fully set up as a corporation, credit bureau Experian says that you next need to obtain an Employer Identification Number. Then, open business bank accounts in your company’s name, fully separating it from your personal finances. Another less-obvious tip they offer is to set up a business phone line in your company’s legal name and make sure that your phone number is listed.
It’s no secret that turning your business into a corporation comes with a whole new set of regulations and processes. Before you take that leap, make sure to investigate what new business practices the legal change will bring and seek advice from other professionals.
Keep up with the credit bureaus
When it comes to your personal credit, there are several laws and standards that the three credit reporting bureaus (Experian, Equifax and TransUnion) use to create your FICO score. For your business, that process is not quite as easy, with Dun & Bradstreet taking TransUnion’s place in the bureau list. You should have credit profiles with all three groups, as banks and vendors can choose to rely on any one of them. That means updating your business information with them regularly and uploading financial statements to complete the profiles and paint the best picture possible.
Before going after a big business loan, your company should do small things to start building credit and show reliability. Even if you have the income to pay for all of your supplies with cash, NerdWallet suggests establishing trade lines from your vendors and having them report your payments to the business credit bureaus. Your vendors will provide products with the expectation that you will pay within a certain period of time, instead of when they are purchased. If you make sure to follow your trade agreement with your vendors and pay everything on time, this will build your company’s credit with a history of on-time payments a bank wants to see.
Just like with your personal life, good business credit will help your enterprise obtain lower interest loans and company credit cards to help it grow. As you establish your business as financially sound, be sure that you pay any and all debts on time and ensure that the credit bureaus are watching for the best possible outcome.