Business credit is a point of confusion for many small business owners. Business Credit can be defined as the extension of trust through trade terms from one business entity to another in which one party receives something of value immediately and agrees to repay the other party at a future date on agreed-upon terms. A D&B® business credit report is the qualitative and quantitative representation of a business’ overall financial health and stability through a wide range of predictive and historic business credit scores and can include associated business information. Dun & Bradstreet Credibility Corp. offers business owners the proactive ability to establish, monitor, and build their own D&B credit profile and business credit scores and better understand how these scores may impact their business.
Remaining uneducated about business credit poses potential risk for business owners, while understanding and leveraging business credit can empower business owners in multiple financial situations. Oftentimes, companies examine your business credit to determine whether they want to do business with you. Your creditworthiness may factor into your potential partners’ decisions about things such as whether to extend you favorable credit terms and rates, sell to you, buy from you, lease equipment to you, or to lend you money.
There are several things that need to be completed before you can qualify for business credit. Let’s go through each of them, step by step.
- Name and Incorporate Your Business. This is an easy step. In fact, most states have made incorporating a business very simple. Companies like LegalZoom offer do-it-yourself guidance for incorporating a business.
- Apply for an Employment Identification Number (EIN). An EIN in your company’s name can be obtained from the IRS by phone, mail, or fax, or online from www.irs.gov. The application process is quick and simple. Once you have an EIN, it will serve as identification for your business for tax purposes (similar to how your Social Security number functions as your personal tax ID).
- Obtain Business Licenses and Permits. Depending on your city and state, you may be required to have certain business licenses and permits in order to do business. For U.S. companies, the Small Business Administration.
- Open a Business Checking Account. Opening a business checking account is an important step toward separating your personal credit from your business credit profile. Banks vary in their offers for business accounts. Look for lower minimum balance requirements and lower transaction costs when evaluating a bank.
- Open a Trade Account. A trade account is an account between businesses that can allow delayed payment for the exchange of goods. A Trade credit is credit that is extended by the supplier to the business acquiring the goods which allows for delayed payment. However, sometimes new businesses find that a trade credit isn’t immediately offered. Many times, businesses need to establish a relationship with the supplier by consistently paying C.O.D. (cash on delivery) for a period of time before the supplier is willing to extend a trade credit. Once a trade credit is offered, businesses should consider taking advantage of it, as trade accounts can be a good way to build your business credit history. While many companies want to start with C.O.D. terms, there are some companies that have been known to extend credit to new businesses, and some do not require any personal credit references. Such companies include:
- Home Depot
Most business accounts have Net 30 terms, meaning any outstanding balance must be paid within 30 days of invoice. However, paying early has more perks for a business credit score than a personal one – your business credit score may improve with early payments. A good way to jump-start this process is to charge a small amount as soon as you get the account, then immediately pay the bill.
Other Business Credit Builders
Having a well-written business plan may also help you build business credit – even before you begin doing business! Sometimes vendors use a company’s business plan to help them decide whether to extend the company credit to purchase goods and services.
Once vendors or lenders do extend you credit, it’s critical that your payments are prompt. It’s also important to make sure your vendors report those prompt payments to the credit bureaus. Vendor payment reports are one of the best ways a business can improve its credit history.
Finally, you can start building your business credit by securing loans that are guaranteed by the Small Business Administration (SBA) or other business associations. If you have good personal credit, SBA loans may be the most attractive option. However, you must be seeking a relatively small loan (usually no more than $350,000). In addition, you will need to provide your personal tax returns or other documentation that will support your high personal credit rating.
While the intricacies of business credit may be difficult for small business owners to fully grasp, we hope that we have set a foundation for understanding the basics and seeing all the possible ways good business credit can be leveraged in favor of the business owner. For more information on business credit, visit dandb.com or call 1-800-280-0306.
This article was originally published in Dun & Bradstreet Credibility Corp.'s Credit Resources.
The information and opinions provided by Dun & Bradstreet Credibility Corp. is provided "as-is" and are solely those of Dun & Bradstreet Credibility Corp. Dun & Bradstreet Credibility Corp. makes no representations or warranties, express or implied, with respect to such information and the results of the use of such information. Neither Dun & Bradstreet Credibility Corp. nor any of its parents, subsidiaries or affiliates shall be held liable for any damages, whether direct, indirect, incidental, special or consequential arising from or in connection with a business's use or reliance on the information or advice offered by Dun & Bradstreet Credibility Corp. You should consult a qualified professional to assist you in determining the most effective business structure for your particular business.