My business is my passion and has been from the moment the idea for it popped into my head. Generally speaking, before a good idea can be implemented, it will require some financial backing to get it off the ground.
I quickly realized when starting out that you really do have to spend money to make money, but the challenge was finding that money to spend.
That’s where I sought the help of any financial institution that would extend me business credit. While it was not always easy to get, I was determined to get access to additional capital to create and grow my business. Keep reading for some important steps I learned about how to build business credit. We’ll dive into the different steps you will need to take, including fixing any issues with your personal credit, setting up your business as a legal entity, and establishing checking and savings accounts for your business.
1. Fix Any Issues with Your Personal Credit Report
Before providing your business with any credit, a financial institution starts with your personal credit history to determine your behavior related to making payments promptly and in using credit responsibly.
If you know your personal credit history doesn’t deliver a good credit score, then you will need to fix this before trying to establish credit for your business.
Get a copy of your personal credit report and look for any issues or problems that you can get taken care of. While it may take a little time to write to these companies and get mistakes corrected as well as raise your score, it’s one of the most important actions you can take to build business credit. In many ways, it’s the foundation upon which your business will be built.
2. Set Up a Legal Entity for Your Business
It is critical for you to set up a legal entity for your business and to separate your personal life as much as possible from your business. You can accomplish this by simply incorporating your company. Rather than use a sole proprietorship structure, which keeps your personal finances connected to the business finances, opt for a corporate structure like a C corp, S corp, or LLC (Limited Liability Company).
Financial institutions are much more likely to provide credit to an entity that has a stringent legal and tax structure. When you have this legal entity in place, you will need to get an Employer Identification Number (EIN) for your business. This provides a way to further separate you and your Social Security Number (SSN) from your company.
The Small Business Administration (SBA) and Internal Revenue Service (IRS) provide great resources to help you accomplish this task, and the information is online.
3. Have Business Checking and Savings Accounts
With both a checking and savings account for your business, you will not only be able to show a history of cash flow, revenue, and payments, but you will also show a creditor that you are responsible and legitimate regarding a fully operational firm.
It will be important to show a creditor your daily average balance so they can see how much revenue and cash flow are available as a personal guarantee of repayment of any debt they allow you to create.
While you will need a business reference to do this, you can ask a mentor or colleague with another company to help you figure this process out.
4. Open a Business Line of Credit
Opening a business line of credit provides a way to show creditors that you can be responsible for borrowing small amounts of money and then paying it back in a timely fashion.
There are many types of business credit lines to choose from, so it is a good idea to do your research and shop around for the credit line that best fits your business situation and credit standing.
- Earn $500 bonus cash back after you spend $3,000 on purchases in the first 3 months from account opening
- Earn 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year
- Earn 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year
- Earn 1% cash back on all other card purchases with no limit to the amount you can earn
- 0% introductory APR for 12 months on purchases
- Employee cards at no additional cost
0% Intro APR on Purchases 12 months
13.24% - 19.24% Variable
- Earn 4X Membership Rewards® points on the 2 categories where your business spends the most each billing cycle, including airfare purchased directly from airlines, U.S. purchases for advertising in select media (online, TV, radio), U.S. purchases made directly from select technology providers of computer hardware, software, and cloud solutions, and U.S. purchases at gas stations, restaurants, or for shipping.
- Earn 1X Membership Rewards® points on other purchases
- Earn 35,000 Membership Rewards points after you spend $5,000 on eligible purchases with the Business Gold Card within the first 3 months of card membership
- Book your flight with American Express Travel using Membership Rewards® Pay with Points and get 25% of those points back
- $295 annual fee
14.24% - 22.24%
at Chase'ssecure website
- New Offer! Earn 100k bonus points after you spend $15,000 on purchases in the first 3 months from account opening. That's $1,250 toward travel when redeemed through Chase Ultimate Rewards®
- Earn 3 points per $1 on the first $150,000 spent on travel and select business categories each account anniversary year
- Earn 1 point per $1 on all other purchases - with no limit to the amount you can earn
- Points are worth 25% more when you redeem for travel through Chase Ultimate Rewards
- Redeem points for travel, cash back, gift cards and more - your points don't expire as long as your account is open
- No foreign transaction fees
- 5% Back or 90 Days Terms on U.S. purchases at Amazon Business, AWS, Amazon.com, and Whole Foods Market with an eligible Prime membership
- 2% Back at U.S. restaurants, U.S. gas stations, and on wireless telephone services purchased directly from U.S. service providers
- 1% Back on other purchases
- Expense management tools to help you track and organize expenses
- $0 annual fee
14.24% - 22.24%
- Earn 5X Membership Rewards® points on flights and prepaid hotels on amextravel.com, 1.5X points on each eligible purchase of $5,000 or more (that's an extra half point per dollar, up to 1 million additional points per calendar year, and 1X points for each dollar you spend on eligible purchases
- Earn 75,000 Membership Rewards® points after you spend $15,000 on eligible purchases with the Business Platinum Card within the first 3 months of card membership
- Select one qualifying airline and get up to $200 in statement credits each calendar year for baggage fees and other incidentals charged by the airline to your Business Platinum Card
- Access to the American Express Global Lounge Collection, including 1,200 airport lounges across 130 countries and counting
- Use Membership Rewards® Pay with Points for all or part of an eligible fare and get 35% of those points back, up to 500,000 points back per calendar year
- $595 annual fee
N/A (Charge Card)
A line of credit gives you a certain amount of capital that you can tap into, pay off, and then continue to use as long as you keep paying back what you borrowed. This action provides a good way to establish a relatively quick history of responsible payments.
5. Leverage Other Types of Commercial Accounts
Also helpful is opening certain kinds of commercial accounts for your business for various things like a phone, a shipping company, a hosting or internet provider, bottled water, and utility company.
You can share a history of payments to these commercial accounts, which in turn, illustrates your level of fiscal responsibility. Open all types of vendor accounts for which you regularly keep the payments current, and that you may use for your business. This will bolster a system of establishing your credibility for credit.
6. Get a Dun & Bradstreet Number
Dun & Bradstreet is the source for business credit information, so it makes sense to get a number so they can provide a credit profile on your company.
The Dun & Bradstreet business credit bureau profile — and their rating — can provide much-needed credibility with financial institutions that respect this organization’s findings. You will need to first have your business entity in place along with your EIN.
7. Find Banks Using New Analytics for Lending Parameters
Today’s small businesses are in luck, thanks to new technology. Various financial institutions are putting analytics to work to gauge creditworthiness of newer companies that may have no established business credit.
According to one article on lending parameters, “Data and risk analytics company LexisNexis Risk Solutions is helping bridge the information gap between banks and businesses by offering alternative-data-based credit risk assessments for lenders to make smarter, safer lending decisions.
“By using advanced analysis techniques, LexisNexis Risk Solutions can identify — and resolve — thousands of data footprints to establish a business’s profile, limiting the lender’s reliance on traditional commercial credit reporting and increasing their ability to lend to more small businesses.”
It’s an exciting prospect to think that technology has now provided a way for more small businesses to be considered for credit.
Nurture Your Relationships with Those in the Credit Industry
All of these recommendations are intended to help you grow your credit, creating a sound basis of responsible credit usage and timely repayment.
Some of this advice can take time to establish for yourself. Start thinking about building your business credit. This habit starts with keeping all of your credit scores high — long before you need to use credit.
Be patient, thoughtful, and strategic in your approach with business credit. Nurture your relationships with those in the credit industry so they know you — and they know they can trust you. It will most likely be these people who will provide you with the necessary financial assistance for years to come.