How Startups Can Establish Business Credit In 7 Simple Steps

business credit Oct 16, 2021

One factor that can greatly influence your business's access to funding, whether it be EIDL, PPP, or other loans, is your business credit. For startups, securing funding can be particularly difficult because of the lack of credit history. In this article, we offer seven simple steps to establish a credit history for your startup.

The Basics of Business Credit

Your business credit report shows potential lenders how responsible you are with business finances and financial obligations. Having a strong business credit history increases your likelihood of obtaining loans with lower interest rates and better terms. Conversely, if your credit history is poor or non-existent, it will be difficult to find loans with reasonable terms or qualify for loans at all. If you are a startup and need to build a strong credit history, here's how to do it.

Step 1. Register Your Business

The first step is to register your business with your Secretary of State's office. If you are a sole proprietor, you do not need to do this, but there are some long-term downsides to operating a business as a sole proprietor. Namely, sole proprietors have a difficult time attracting investments and can have trouble ascertaining loans from banks and other lenders.

To avoid this, incorporate your business as an LLC or Corporation. Register your business with the Secretary of State in your home state. This creates a legal entity and separates the business from the owner. That way, when you do secure a loan, it only affects the business's credit profile and not your personal credit.

Step 2. Obtain an EIN Number

The next step is to apply for an EIN. An Employer Identification Number (EIN) is like a social security number for businesses. You will need your EIN when you file your business tax return or payroll tax return. You will also need an EIN to complete many of the following techniques on this article, such as opening a business bank account or applying for credit. Applying for an EIN is simple and can be done on the IRS website.

Step 3. Open a Business Bank Account

Opening a bank account for your business is critical. It effectively keeps your personal and business finances separate. Without a separate business bank account, the lines between personal and business finances can become easily blurred, and this can reflect poorly on your creditworthiness. By keeping your business finances separate, you can clearly identify business expenses, cost of goods sold (COGS), profit and losses, and more. This will reflect positively on your business when applying for credit.

Step 4. Get a D-U-N-S Number

A D-U-N-S number is like an EIN; it verifies your business identity to the rest of the world. Many lenders request your D-U-N-S number during the application process. It allows lenders to verify your business and base their credit decision largely on your business credit profile and less on your personal credit profile. Having a D-U-N-S number accompanied by a strong business credit history will increase your business creditworthiness.

Step 5. Request Net-30 Accounts From Suppliers

A net-30 account is an account that gives you an extra 30 days to pay your invoice after you purchased the product. Essentially, it lets you buy the product now and pay for it later. Many vendors will report your payments to business credit agencies, such as Dun & Bradstreet, Experian Business, and Equifax Small Business. Paying these net-30 invoices on time or early can dramatically increase your business credit score, without taking out any business debt.

Step 6. Apply for a Business Credit Card

Another way to establish a business credit history is to apply for a business credit card. One of the best places to look for a first-time business credit card is your bank. Since your bank holds the funds for your business, they may be more likely to issue your business a credit card. By using your business credit card for your business expenses (and paying the bill on time), it will quickly build a strong credit history.

Step 7. Borrow Money Wisely

When it comes time to take out a business loan or line of credit, remember to borrow responsibly. Only borrow what you can pay off, or expect to pay off as a result of calculated growth. Making your monthly payment on time and paying your loans off greatly improves your credit while missing payments and deadlines will harm your credit.

Remember to keep your credit utilization in balance as well. Credit utilization is the ratio of your available credit to your overall credit. For example, if your overall credit between credit cards and loans is $100K, but you only have $1K available (you're using $99K of your $100K), your utilization would be very high. Try to use only 30% of your overall credit at one time.

Get Help With Your Business

Do you need help forming or funding your business or side gig? Skip can help with your formation, SBA loans, grants, or other business financing options. Get ongoing personalized help from our team. Join Skip Premium today and get 1-1 support for your business.

How Else Can Skip Help? Whether you need assistance navigating funding for your small business — like SBA loans, grants, or other financing options, or guidance with government-related services — like TSA PreCheck or DMV appointments, we’re ready to help. Become a member and skip the red tape.

Dan Ansaldo

Dan is the Head of Content for Skip and has written on numerous topics including business, education, government, history, and more.

Great! You've successfully subscribed.
Great! Next, complete checkout for full access.
Welcome back! You've successfully signed in.
Success! Your account is fully activated, you now have access to all content.