Unlike jobs where you render service to earn cash, running a Business means providing money to make money. This is especially challenging for new merchants that have just dipped their toes in the business industry.

Currently, most traditional lenders, Credit unions, and commercial banks are reluctant to approve the loans of businesses like startups because they have no credit records and no credit history. The million dollar question is, how can businesses build their credit records when no one wants to give them a credit line?

The situation leaves merchants to cling to their personal funds to finance their business, a plan that is neither sustainable nor advisable. Using personal credit to provide capital for a business means that the basis for the granting of your loan would be dependent on personal loans such as mortgages, car loans, and personal credit cards. The presence of a Business Credit allows the separation of your finances from that of your business. Regardless of your personal credit rating, your business credit will depend on the financial activities of your company.

The lack of working capital in the early stages of a business often leads to its failure. Hence, it is essential to establish a proper business credit. It sounds overwhelmingly tricky, and it is. So WeCompete Lenders has prepared this article to guide you in building your business credit.

Why use Business Credit?

Although business credit and business credit score are often interchangeably used, they are actually two different concepts. A business credit score is a number that summarizes how well you handle your business finances, whereas business credit is your ticket towards acquiring a business credit score. It is the availability of reports and records of your financial activities. All businesses need to establish business credits so it can generate credit reports that will result to credit scores.

You are already probably familiar with terms such as credit, credit scores and credit reports because these are the same terms used for your personal finances. For a venture to be successful, however it must separate the personal from the business.

Separating your business finances from your personal finances will make it easier for you to keep track of your expenditures and your financial status. It will also influence the results of your loan application and approval.

For owners of startup companies, getting that first loan probably means using your personal credit. The reports will reflect any personal loans you have. Even if lenders approve the loan, your personal credit will likely be maxed out meaning you won't be able to apply for personal loans. Also without an established business credit, lenders will require a guarantee that you can pay-off a business loan. More often than not you will be asked to provide collateral.

With an established business credit, you will have greater chances of loan approvals. Lenders are more likely to offer you loans than you seeking out loans. When you borrow, you will receive better terms and a lower interest rate if you have solid business credit. These advantages will give you more breathing space and will help you save up for the expansion of your business.

How do you Build Credit?

For startup companies, the real challenge when building business credit is convincing vendors and suppliers to submit payment histories. Most would report the credit history only when you have missed several payments.

You may encourage your vendors and suppliers to report your credit history but it is out of your control whether they choose to do so or not. Here are some tips that you can do on your part if you want to establish a business credit.

1. Build your business entity

This step is crucial to building business credit. Without an established business entity, all financial activities of the business will reflect on the personal credit report of the owner. There are many entity structures, and not all of them can separate personal credit from business credit.

Unincorporated entities such as sole proprietorship and partnerships are often not granted business credits. With these structures, the finances of the owner and the business are seen as one. Financial activities will reflect on either your business account or personal account and possibly on both.

Building credit is easier for businesses with the following structures:

• C corporation - The quickest way to establish and build business credit is through a C corporation. This business structure provides a clear distinction between your personal and business finances because it allows the business to be taxed separately from the owners. In turn, C corporations get lower tax rates on their first $75,000 in annual income. The downside of a C corporation is the degree of difficulty in setting it up. However, it is an ideal company structure to take on when the goal is to establish healthy credit lines.

• S Corporation - This structure channels federal taxes by passing corporate income and credit through its shareholders. Most business owners prefer S corporations over C corporations because the latter is subjected to double taxation. An S corporation also establishes the separation of business and personal credit thus it also has the same credit building advantages as C corporations. The S here stands for “small” because the maximum number of stakeholders for this structure is limited to 100. This is ideal for startups, but if you are planning on heading a large company, C corporation is the way to go.

• Limited Liability Corporation - An LLC combines the liability protection of a corporation and the tax advantages of an unincorporated business. Of all the ways to structure a business, the LLC is the easiest to establish. The liability protection provides a separation between personal and business finances.

Consult with a certified public accountant before establishing your business entity. They can offer advice on the structure that would be most appropriate for your business

2. Apply for a tax ID Number.

All businesses are encouraged by the Internal Revenue Services to have a federal tax ID number or an employer identification number (EIN). The IRS uses your EIN to keep track of your business transactions including income and credit. The EIN is also used to open bank accounts for the business and serves as the basis of your credit profile.

EINs are not a requirement. Business owners can opt to use their social security numbers instead for tax purposes. However, getting an EIN is still advisable. It will be especially useful when applying for loans later on because the EIN allows for your credit record to reflect on your business credits rather than on your personal credit reports.

3. Open a business bank account

Officially separating personal and business finances begin with having different bank accounts for each of them. After registering for an EIN, business owners should consider applying for a free business checking account. After all, at least one bank account is needed as a reference when applying for a business loan and that bank account must ideally be operational for two years.

4. Get listed with business credit bureaus.

Building credit means establishing a business credit score. You can do this by applying for a record of your business through credit bureaus. Unlike personal credit scores that follow a certain standard, the computation of business credit score varies from bureau to bureau. Each bureau requires different information and applies varying data collection procedures.

Lenders often ask for the business credit scores upon loan application. They can also pull it from credit bureaus at any time, so it is best to keep your record stellar and updated.

5. Establish a physical address and utilities.

Setting up a business address and getting your business name on utilities is an excellent way to cement the separation of your finances. Utilities such as electricity, phone and internet bills are considered credit lines. Paying them on time can hasten the establishment of your business credit.

Furthermore, having a business phone number will allow your company to sign up for business directories. These directories help get your name out and connect you with more clients.

6. Build relationships with your vendors and suppliers.

Your business credit rating will grow at the same rate as the expansion of your network of vendors and suppliers. Fostering good relationships with your vendors and suppliers can help establish your business credit. The more of your vendors and suppliers report your payment history, the faster it is to build your credit. It is easier to convince suppliers to report your payment history to bureaus when you have a solid working relationship with them.

7. Apply for a business credit card.

Startups need access to capital that can finance the day-to-day operations and the growth of their business. However, startup companies are not eligible for loan products available for small businesses. Most business loans require companies to be at least operational for two years.

One option is to apply for a business credit card. A business credit card functions in a similar fashion to a personal credit card. It provides your business access to a revolving credit account. You borrow money every time the card is used to pay for purchases. It also has a credit limit. The credit provided by the card company is automatically replenished when you pay your balance.

Having multiple credit accounts is a fast way to establish business credit, but applying for several credit accounts within a short-period of time can do considerable damage. Though a business should have a lot of credit accounts, application to those accounts must be adequately spaced out.

A credit card is a double-edged sword. It is one of the easiest ways to build your credit score but only when used properly. Not paying in full before the deadline can hurt your credit score.

8. Borrow responsibly

Excellent credit scores are built through good borrowing habits. Utilizing several credit accounts and paying them on time can steadily establish your business credit score.

Your credit histories and your credit utilization take part in building your credit score, but it is your payment history that influences your rating the most. Payments must be made in full and on time because they will reflect on your report.

Steadily establish your credit score and keep improving it by being a responsible borrower.

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