How to Establish Business Credit

When a small business owner decides he needs extra funding to add inventory, expand the company or finance slower times, he might encounter some difficulty getting credit from a lender. Many times, this is because he has failed to build up business credit. Instead, he has been building personal credit rather than having a separate business account. It's always a smart move to build business credit right from the start.

Instructions

1. Start your business by establishing the right type of foundation. Create a business plan and strategy. Form your company as a sole proprietorship, partnership or corporation. Also get an Employer Identification Number (EIN) for your business taxes, which is another way to keep your business separate from your personal credit. Discuss your options with a financial adviser, attorney or tax accountant to determine which business set-up is best for you.

2. Register your company with D&B, a company that provides a ratings listing and credit reports. Request your D&B "Data Universal Numbering System" or DUNS number. This number is equivalent to a personal social security card, except it's for your business. This is the number that creditors and lenders will use when they ask for a copy of your organization's credit report. Now you are all set to apply for business credit.

3. Build up your business credit by establishing a good rating with your vendors. Buy equipment and inventory and make your payments on time. Start out with a line of credit from "friendly creditors," such as an office supply store, which will give you about $500 in credit and 30 days to pay the entire balance. Open up several of these accounts and make a number of smaller purchases, such as $50 or $100 each. Again pay off your balances before or on the due date. These companies will begin to report to D&B, which will define your business credit and a numeric indicator called the "Paydex Score." The range of this measurement, which is from one to 100, indicates whether you pay your bills early, on time or late. You want at least an 80 score.

4. Establish a relationship with a local bank. After you build your credit rating with the smaller providers, you will be able to approach this bank for a small loan. Now you are building credit with a lender. Eventually, you will be able to borrow larger amounts from major banks.

5. Remember that you should never pay for any business expenses with your personal credit card. Always keep the two accounts separate. Also, keep in mind that just because you are establishing a good Paydex Score for your business does not mean that your personal credit is moving upward as well. If you have poor personal credit, you will have to repair that separately.

Tips & Warnings

• Start establishing credit as soon as possible.

Resources

• U.S. Small Business Administration