How to Establish Credit for Your Small Business

A strong credit history for your business is the foundation for success and expansion. It can reduce your interest rate of loans and provide you with access to capital to fund growth. It can take up to six months to establish enough credit for your small business to produce a credit score. If you plan or requesting a loan or making a large purchase for your business, allow enough time to establish credit before applying for the loan.

Use this quick guide to learn how to establish credit for your small business:

1) Separate personal and business credit. In order to separate your personal finances from your business finances, you’ll need to establish a business entity. Typically, this means you’ll need to incorporate your business or set up an LLC (limited liability corporation). In order to secure business loans and establish credit for your small business, your business needs to be it’s own entity. A CPA or attorney can advise you on the best legal structure for your business.

2) Obtain a Employer Identification Number (EIN).
Just like a an individual must have a social security number, a business entity should have a EIN number. Assigned by the IRS, an EIN is a nine-digit number used by employees with employees, corporations, business partnerships, and other types of entities.  When used strictly for identification, this number is referred to as a Tax Identification Number, or TIN. An EIN number is linked to your business bank account and helps you establish credit for your small business.

3) Open a business bank account.
Oil and water doesn’t mix. And neither does a personal and business bank account. A business bank account provides a lender a window into your business cash flow for the basis of taking on more debt, and is a start to establish credit for your small business. Consider a credit union which may have lower fees or more flexibility than your local bank.

4) Register your business with credit bureaus. The four major credit bureaus are Experian, Equifax, TransUnion, and Innovis. It’s also a good idea to register with Dun & Bradstreet to obtain a D-U-N-S (Data Universal Numbering System ) number; besides helping you to keep an eye on your credit and reduce your credit risk, your Dun & Bradstreet business credit file can help you find new customers.

5) Maintain a good business credit rating.
Establishing a good business credit rating is similar to developing a good personal credit score. Tips to maintain a good business credit rating include keeping your account active and paying creditors based on terms agreed upon and by due dates — and early if possible. A good Paydex score, numerical score issued by Duns and Bradstreet to businesses, is a reflection on payment promptness to creditors. Paydex scores range from 0 to 100, with 90 to 100 being excellent, and scores above 70 being good. Most lenders look for a Paydex score of at least 75.