Building Business Credit

Need a business loan but you’re not sure how to build a business credit profile?

Financing is a critical part of growing a small business. Nothing is more important to the health of a small business than having the right financing in place.

Building business credit is about establishing on time, or early, payment histories and having those payment histories reported to the three business credit reporting agencies. Therefore, building your business credit takes time, careful planning, and being educated on what steps to take. The following are steps to Building Business Credit.

1. Create a Legal Business “Entity”. In order to create and build a “business credit profile” that is separate from your personal credit, you will need to structure your business as a Corporation or LLC. If you need help establishing your business entity, go to www.mycorporation.com and review your online options.

2. Apply for an EIN. Business credit is tracked using your business name, business address and employer identification number (EIN). You may apply for an EIN from the IRS online at www.irs.gov. Every corporate entity must file a SS-4 form with the IRS to obtain their EIN. Make sure you have properly established both your Federal and State business tax ID numbers under the exact business entity name.

It is important that every agency and trade credit vendor has your business listed with the SAME exact legal name and tax identification number. It is equally important that your exact legal name is consistent with the State, IRS, 411 Directory, power bill, phone bill, etc.

3. Establish a presence. Your business must have a physical office space that receives regular mail, even if it is at your home. The telephone number must be listed under the business name in the 411 directory and be answered in your business name. Also, your business should have its own email address and web site. Visit www.godaddy.com and register a business domain name.

4. Obtain Licensing. Following proper regulatory guidelines for operating in the City or Jurisdiction where you do business is critical for building good business credit. Obtain a business license, permits, registrations, etc.

5. Gather Financials. Begin to build your financial statements from the day you begin your business. A business should have a balance sheet and income statement for at least the last two years. If your business entity is brand new, but you’ve been operating as a sole proprietor or partnership, you may use those financials.

6. Get Bank References. Open a checking account under the exact legal name of the business and correct physical address with at least one bank. Ideally, a business will have a bank account that is a minimum of 2 years old. Moreover, having an average daily balance of $7,000 plus for the last three months will put the business in a good lending position.

Your banking history reflects how well you manage your cash flow. Lenders want to know the money made by your business is consistently capable of paying the debt in incurs.

7. Get Tracked. Dun & Bradstreet is the largest tracker of business credit in the United States. Once your business is setup and has been issued a Federal tax identification number, establish a profile with D&B and receive your FREE D-U-N-S Number at www.dnb.com. Most banks and lending companies will ask for your DNB number when applying for credit.

8. Begin Building. Once you have received your DNB number you are ready to apply for business credit. The idea is to establish five (5) favorable trade references. Trade references are just vendors such as; Office Depot, UPS, Stables, Fedex/Kinkos, T-Mobile, Chevron Oil, etc. To avoid getting your business profile flagged, do not apply with these vendors all at one time.

As your business begins to develop a credit profile, it will be ranked with a Paydex Score. A Paydex Score is the equivalent to your personal FICO score, but is calculated differently for a business. Business Paydex Scores range from 0 to 100. Unlike your personal FICO score, it makes a difference for every day you pay earlier than the actual due date. A Paydex Score of 80 or more will qualify your business for the best rates and terms.

In the steps above, I have guided you through building a favorable and separate business credit score. If done properly, it will take about six (6) months to have a decent score and in two (2) years your business credit should be able to stand on its own.

Best of luck.

Blane Russell, President of Eagle River Mortgage. Established in 1997, ERM is now the largest independent brokerage in Idaho. Blane specializes in residential and commercial mortgage solutions. He is also a preferred lender with multiple resort communities across the northwest. His early experience in debt collections has provided a knowledgeable foundation for his continuous efforts in helping consumers repair their credit, gaining back the credit-worthiness they deserve.

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