The process of opening a new venture, while exciting, also brings about several problems. Among them, one of the greatest could be the establishment of business credit. For a startup firm, a healthy business credit profile, in many instances, is often all the difference between failure and success. Here’s how to build and maintain business credit, which will get you better financing options, better supplier terms, and protect your personal credit.

Understanding the Importance of Business Credit

Amongst the most significant assets any given company could ever have, business credit turns out to be much more important in the case of a startup. In contrast to personal credit, which ties back to an individual, business credit shows the financial health of your business. Strong business credit could enable your startup to qualify for loans, get better terms from vendors, and even win larger contracts. Besides this, it helps one to disentangle his or her personal finances from that of the business; a very important point, both legally and for tax purposes.

With a poor business credit profile, it may be hard for startups to access capital, and this is where many would resort to using personal credit cards or taking loans, which is highly risky. Poor business credit will undoubtedly result in higher interest rates and less decent conditions of repayment, placing unnecessary stress on the cash flow of your business.

Step 1: Incorporate Your Business

Building business credit, therefore, begins by organizing your business as a legal entity apart from yourself, usually through incorporation or the formation of a limited liability company (LLC). As such, it provides a legal boundary separating the owner’s personal and business transactions.

Once you incorporate, you will be assigned an Employer Identification Number (EIN) by the IRS for your business. This EIN is kind of like a Social Security number for your business. You’ll need it for tax purposes, when opening business bank accounts, and when applying for business credit.

Step 2: Open a Business Bank Account

Immediately after incorporation, you should open a bank business account. This will help in managing all your financial transactions with regard to the company and thereby establish some financial history of your business. It is also necessary to ensure that all income and expenses of a business concern are handled through this account to avoid intermingling of personal and business finances.

A business bank account helps you manage your finances more efficiently and also tells lenders and credit bureaus that your business is a legitimate entity. Also, in most cases, a business bank account is a requirement when applying for a business credit card or loan.

Step 3: Apply for a Business Credit Card

Once a business bank account has been opened, one of the most important steps is applying for a business credit card. Business credit cards are among the easiest ways to initiate the establishment of your business credit. They provide you with flexibility in handling expenses and afford you an opportunity to establish a history of payments, which is one of the key factors in the building of business credit.

Applying for a business credit card, ensure that it reports to all major business credit bureaus: Dun & Bradstreet, Experian Business, and Equifax Business. Ensure responsible usage by maintaining low credit utilization and paying the balance in full every month. This ensures you are building a positive credit history and, over time, will improve your business credit score.

Step 4: Establish Trade Lines with Vendors

Another way to effectively build business credit is by building trade lines with vendors and suppliers that report the payments to business credit bureaus. Most vendors have a net 30, 60, or 90-day payment term available, which allows you that amount of time to pay the invoice in full.

You can demonstrate financial responsibility and build good credit over time by negotiating terms of payment and paying your invoices on schedule or in advance. Make sure the vendors you work with report your payment history to the business credit bureaus. Not all of them do, so it is worth asking their reporting policy in advance of creating a trade line.

Step 5: Monitor Your Business Credit Reports

It is quite essential to ensure that checks on your business credit report are carried out frequently in order for you to have a good profile. While there are a number of credit bureaus that keep business credit reports, Dun & Bradstreet is one of the most commonly utilized credit bureaus. Such reports contain details regarding your company’s credit history, including the history of your payments, current debts, and credit inquiries.

Review your business credit reports on a regular basis. Ensure all information is captured appropriately and current, perhaps well in advance of any new loan application or credit inquiry. If there are inaccuracies, dispute them immediately, since these can dent your credit score. By monitoring regularly, you will find possible errors much more easily and correct them before they hurt your credit profile.

Step 6: Build a Relationship with Your Bank

A better relationship with the bank helps to introduce business credit. When your business is huge, you may go for loans or a line of credit. A bank knowing your business is bound to give facilities on terms that are very easy and may not pinch your business.

The close banking relationship may also be established by making use of the bank for checking accounts, savings accounts, and merchant services. Keep your bank informed about the concerns of your business and also about your plans of growth. This will develop trust and make the ways easier to access credit when your business needs it.

Step 7: Apply for Business Loans

Once your business credit is established and you have a track record of responsible credit use, you can be in a good position to apply for business loans to further grow your business. Business loans are a great source of cash needed to expand, build equipment, or manage cash flow within the business.

When applying for a business loan, lenders will look at your business credit profile, your financial statements, and your business plan. A high business credit score will give you an advantage in such situations, which can also help in acquiring favorable loan terms like low interest rates and higher limits.