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When your business is just starting out, establishing business credit is crucial to getting off on the right foot. But building business credit comes with its fair share of challenges. Getting approved for small business loans and credit cards is often tricky. In 2019, 53% of organizations experienced a financial shortfall, i.e., they got less funding than they were looking for, according to a Federal Reserve small business credit survey.
There are steps you can take to reduce your chance of being denied and ensure that you’re in a good position to be approved for a line of credit for your business, though.
Why building business credit is so critical
How do you expect to pay for business expenses if you don’t have business credit to draw on? Likely, you’ll be paying out of pocket for everything from supplies to payroll. Even if your business takes off, that could leave you in a financial hole.
Building credit is cyclical. Owning a better business credit score gives you a better chance of securing capital and keeping your cash flow liquid. It also increases your odds of getting more favorable repayment terms, credit limits, interest rates, etc. But according to an Entrepreneur survey, 45% of small business owners didn’t even know they had a business credit score, and 82% said they didn’t know how to interpret the said score.
While your business credit score is separate from your personal credit score, your personal credit will have an impact on whether you’ll get approved for a small business loan or corporate credit card. So, getting your house in order is an important part of building business credit.
How charge cards help you build business credit
As with traditional personal credit reports, business credit reports will include information directly related to your company’s credit, like payment history, account details, and public records (liens, bankruptcies, etc.). That payment history can include credit and charge card bills. The terms charge card and credit card are often used interchangeably, and while they’re similar, there are some key differences.
Both credit cards and charge cards appear on credit reports, and both types of cards will affect your credit score, but that’s about where the similarities end. With business credit cards, your credit utilization ratio comes into play. Here's how you can calculate your credit utilization ratio:
Amount you owe (your balance) / Amount of credit you have available (your credit limit)
For example, if you have a credit limit of $15,000 and a balance of $3,000, your credit utilization ratio ($3,000 / $15,000) is 20%.
Your credit utilization ratio factors into individual cards as well as overall. So if you have multiple cards with varying balances and credit limits, your overall credit utilization could be higher or lower. Experts recommend keeping that number below 30%, both for individual cards and overall, to show that you’re a responsible borrower.
Charge cards, however, do not have credit utilization ratios because they don’t have actual credit limits—just shadow credit limits. There’s no preset spending limit with shadow credit limits, but that doesn’t mean you have unlimited credit either. However, your credit score won’t get dinged if you get close to your limit like it could with a credit card. With charge cards, you’re required to pay your balance in full each month—you don’t carry a balance—so you won’t pay interest and can avoid going into a debt spiral.
How to establish and build business credit in 9 steps
So, what do you need to do to start establishing business credit for your startup venture? Establishing business credit isn’t going to happen overnight, but taking these nine steps will help you build business credit more efficiently.
1. Incorporate and register your business
Any corporate lawyer or account worth their salt will advise clients to establish a corporation or limited liability company (LLC) rather than going the sole-proprietorship route. Taking this step can have several benefits:
- Improved interest rates on loans
- Greater borrowing power: A business can get 10-100 times more financing than an individual, according to the Small Business Administration (SBA)
- Get lines of credit from suppliers to keep your capital
- Avoid risking any personal obligations like your mortgage or auto loan by separating your business and personal funds
2. Acquire an Employer Identification Number (EIN)
Setting up an LLC or C-corporation will include receiving an Employer Identification Number (EIN), or business tax ID, which is required to move forward with the subsequent steps. If you decide to go the sole proprietor route, you can apply for an EIN through the IRS, as long as your principal business is located in the United States or a U.S. territory.
3. Open a separate bank account for your business
You can finally separate business from pleasure (or whatever unpleasant things you have to deal with in your personal finances, like paying off bills).
As a business owner, you need to have a bank account with your business name. To open this type of an account, you’ll need an EIN (or a Social Security number for sole proprietors who don’t obtain an EIN), your business’s formation documents, ownership agreements, and business license to open a business bank account.
4. Build credit with vendors and suppliers
Getting net-30 vendor accounts — meaning you have 30 days from your purchase date to pay off your bill in total — with businesses that report to corporate credit agencies can help you build business credit. Paying your invoices on time (or even early) not only helps build credit rating but also enables you to establish solid relationships with your vendors as a reliable client.
5. Work with vendors who report to credit reporting agencies
If a vendor you work with doesn’t report to the major credit reporting bureaus, that will not help you build business credit.
The three major business credit bureaus are Dun & Bradstreet, Experian Business, and Equifax Small Business, not to be confused with the three major consumer credit bureaus, two of which — Experian and Equifax — are the same. The third is TransUnion instead of Dun & Bradstreet. Before hiring a vendor, make sure that they report to one or all of the business credit bureaus to ensure you’ll build business credit by working with them.
6. Always pay your bills on time
This is as important with your business as it is with your personal credit history. Having a solid repayment history establishes your credibility as a borrower. Making on-time payments can help boost your business credit score, and conversely, paying late can ding your credit score.
It’s not just your credit history that you have to worry about, though — making late payments also can affect your credit limit. Your lender can lower your credit limit at any time if they determine you’re a delinquent borrower.
7. Check your credit reports and score regularly
Much like you would with your personal credit report and score, it’s important to stay on top of your business credit reports and scores as well. With your personal credit reports, you’re legally eligible to obtain these for free once a year upon request through annualcreditreport.com. Business credit reports generally aren’t free. And while there are “free” business credit score services, they’re harder to come by and likely won’t offer the most complete picture with a full credit report. Instead, you’ll get alerts if your score changes and can access summaries of our report.
To order your business credit report from one of the three major credit reporting bureaus, it can cost anywhere from $39.95 to get one-time access to Experian’s CreditScore Report to $399.95 for a package of five reports from Equifax.
Unlike traditional credit scores, like your personal FICO score, which range from 300 to 850, with 300 being poor and 850 being exceptional, business credit scores typically are measured on a 0 to 100 scoring system. But no matter the method used to measure your score, paying bills on time, staying out of legal trouble and avoiding taking on too much debt should give you at least a “good” credit score.
8. Get a business credit card or corporate card
A corporate card is a game-changer for business owners to prevent using personal finances to pay for company expenditures. It may be difficult to qualify for a corporate card, but you can find specialized startup business credit cards that are particularly beneficial for novice businesses.
Comparable to the credit vs. charge card conundrum, corporate cards and business credit cards are slightly different as well. Any company or sole proprietor is eligible for a small business credit card, but only businesses pulling in more than $4 million in revenue with $250 million in annual expenses are eligible for corporate cards.
9. Don’t close existing accounts and stay patient
The length of business credit history also factors into your credit score, so keeping accounts open, even if you don’t use them frequently, can help you build business credit — the older your accounts, the better your creditworthiness.
Closing an older account can be counterproductive. You’d be better served by putting smaller purchases that you know you can repay on older accounts to keep them open and active, rather than closing them and reducing the age of your accounts.
Try not to get down if your score doesn’t immediately shoot up despite your taking actions to establish business credit. It can take time for payments to show up on your credit report or affect your credit score.
Build your credit and control spend with Ramp
If you’re looking for an alternative option to a traditional business credit card, Ramp is your answer. Ramp reports to the major business credit reporting agencies, allowing you to build credit, while also offering a host of useful features for managing and controlling spend. It’s the only financial automation platform designed to save you both time and money.
Ramp gives you visibility and control, and suggests ways to reduce your spend by ensuring that resources are used to grow your bottom line and building a solid foundation for a long-term solution.
Most credit card companies push earning points and perks, which just pushes you to spend more, but Ramp’s software helps you reduce spending. Ramp offers smart corporate cards in conjunction with the top-rate spend management software with a software-first, card-second mentality.
If you want to see how Ramp can work for you, try it out for yourself with this product demo.