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Building a business is hard. Funding a business is even harder. Many small business owners have all but destroyed their personal finances in the process.
The good news is, it doesn’t have to be that way. With corporate credit, a small business owner can access a corporate credit card, or even multiple corporate cards. Your business will eventually be able to fund itself.
What is Corporate Credit?
Corporate credit, or business credit, is credit in the name of your business rather than in your name personally. Sometimes a personal guarantee is required, and sometimes not. With strong corporate credit, you are less likely to have to provide a personal guarantee in some cases.
While not the worst thing ever, and sometimes necessary, it is a good idea to limit the use of a personal guarantee as much as possible.
When you apply for a corporate card or any other type of corporate account, you use your business name, your business contact information, and your EIN instead of your Social Security Number.
Then, the business is responsible for repayment. An actual business credit card does not even show up on your personal credit report. Meaning, your personal credit scores will not be affected by your corporate credit accounts.
This is important for any business owner, but with many retired individuals starting businesses these days while on a fixed income, it is especially important for them.
How to Build Corporate Credit
It starts with how your business is set up. Unlike personal credit, corporate credit does not build passively on its own. For more information on the differences between business credit and personal credit check out our article, Business Checking vs Personal Checking.
If your business is not set up in a way that provides separation from you as the owner, any credit accounts will be considered personal, and they will likely report to your personal credit reports. So, how do you set it up in a way to start building corporate credit separate from consumer credit?
Step 1 – Choose a Company Name and Contact Information
Ensure your business has its own phone number and address. In addition, you need to choose a business name that does not indicate a risky industry.
The phone number needs to be toll free and listed in the 411 directory. You can get a business phone number that will work over the internet instead of phone lines.
You can also set it up to forward to any phone you want too. Then, simply use your personal cell phone or landline if you want. Whenever someone calls your business number it will ring straight to you.
The address needs to be a physical address where you can receive mail. A P.O. Box or something similar will not work.
If you run your business online or from your home, and do not wish to use your home address, consider using a virtual office for a business address.
Step 2 – Establish a Business Entity
Incorporating your business as an LLC, S-corp, or corporation is necessary. This adds credibility to the idea that your business is legitimate. It also offers some protection from liability.
The option you choose does not matter as much for building corporate credit as it does for your budget and needs for liability protection. The best thing to do is talk to your attorney or a tax professional.
Step 3 – Get an EIN Number for Your Business
Get an EIN for your business. This is an identifying number that works for businesses in a way similar to how an SSN works for individuals. Some business owners used their SSN when applying for business credit accounts.
This is what a lot of sole proprietorships and partnerships do. However, it really doesn’t look professional to lenders, and it can cause your personal and business credit to get all mixed up.
You need an EIN. You can get one for free from the IRS. The process is fast and easy. You will need your business name and contact information. The form also asks for your entity type.
Step 4 – Open Up a Business Bank Account
Open a separate, dedicated business bank account. There are a few reasons for this. First, it will help you keep track of business finances. It will also help you keep them separate from personal finances for tax purposes.
There is more to this story though. For example, there are some types of funding you cannot get without a business bank account.
Also, often lenders and credit cards want to see a business bank account with a minimum average balance. Not to mention, you can’t get a merchant account without a business account at a bank.
Without that, you can’t accept credit card payments. Studies show consumers tend to spend more when they can pay by credit card.
Step 5 – Apply for a DUNS Number
Business credit reporting agencies use their own system of identifying numbers. Some of them are simply assigned by the agency, like the Experian BIN.
Yet, you have to apply for a DUNS number from Dun & Bradstreet. They are the largest and most commonly used source of business credit reports. Every credit file in their database has a D-U-N-S number. Apply on their website. It’s fast, easy, and free.
Step 6 – Open Business Tradelines
Once your business is properly set up, you need to open business tradelines. That sounds easy enough, right? The thing is, if you want to build corporate credit, not just any tradelines will do.
Without already having established corporate credit, it can be hard to get tradelines in the name of your business. You have to find those vendors that will extend credit without established credit. They also have to report your payments to the business credit reporting agencies.
The key is finding vendors that do not require a credit check for approval. You want those that only require factors like minimum time in business, EIN, business bank account, or other business basics, for approval.
Note: They may require your SSN for identity and informational purposes, but not to pull personal credit.
While many will let you know what they require for approval, few advertise if they report. This can make it difficult to get enough accounts reporting to build a business credit score.
We compiled a list of net 30 accounts that do report to the business credit bureaus.
Additionally, below are a few options to get you started. Each one of these builds your corporate credit a) without checking your personal credit, b) without requiring a personal guarantee, and c) is accessible to even new businesses.
Divvy Corporate Card
The Divvy corporate card can be a great way to start. With more than one way of underwriting, it’s possible to get approval even if you do not qualify with traditional underwriting.
They can look at other factors for approval. Often it is monthly income, annual revenue, time in business, and other financial data, rather than just a credit score.
This means if you do not qualify for another corporate credit card, you may still qualify for this one, and they do report.
Divvy is also great to help manage employee expenses, as well as employee spending, through the use of employee cards.
Nav’s Vendor Tradeline
Nav offers business credit monitoring services for a monthly fee. There are three options, Business Manager, Business Boost, and Business Loan Builder.
Business Boost and Business Loan Builder cost more than credit monitoring. They help you build your business credit, too.
One of those is that they will report monthly payments on these programs to the business credit reporting agencies. So, there is no new funding, but this account is definitely useful for improving your business credit scores and reports.
CreditStrong Business Credit Builder Loan
Credit Strong offers a solid program that can help you add at least one account. Rather than a corporate credit card, it combines a cash secured commercial installment loan and a commercial savings bank account.
Basically, you make monthly payments into a savings account at a predetermined rate. Credit Strong reports these payments on your business credit report as payment on an installment loan. It’s important to note you do not receive any loan proceeds.
That means this is literally just for building credit. It is not a source of funding, and you can not access the funds in the savings account for the life of the loan. This account will not help you manage expenses.
Step 7 – Make Payments Early and Keep Your Balances Low
This is a no brainer. While a corporate credit score isn’t directly related to balances on corporate cards and other accounts, if lenders check balances and see a ton of huge amounts, they may get nervous. Keeping balances as low as possible is best.
The score is directly related to payment history. So ensuring there are no missed or late payments is vital.
Step 8 – Monitor Your Business Credit Reports Regularly
Although you will have to pay for access to business credit reports, it’s worth it. Though not free, there are ways to save money on business credit report monitoring. The business credit reporting agencies all offer monitoring options, but they are pricey.
Not only do you want to know where you stand in regards to your business credit score, you want to make sure all information is up to date and accurate. Also, pay attention to which accounts are reporting.
What’s the Difference between Business Credit and Personal Credit?
The main difference is that business credit is in the name of the business, not the owner. Personal credit is linked to the consumer individually. There are a number of other differences as well however. Consider the following examples.
Personal credit scores rise and fall with the Credit Utilization Rate. This is the credit you’re using, divided by your total available credit. This ratio does not affect business credit scores.
Late Payment Reporting
Personal credit cards generally offer a 30 day grace period before a late payment is reported as late, thus affecting your score. In contrast, a business credit card will likely report late payments after only one day past the due date.
As a result, it is much more important to be careful with these payments. Late payments affect your business credit score much more quickly.
Inquiries have a negative impact on your consumer credit score. Inquiries do not have as much of an impact on your business credit score.
Good Score vs. Bad Score
Consumer FICO scores range from 350-850, with 850 being the best.
Your business credit score, or your corporate credit rating, usually ranges from 0-100. Also, 100 is the best score you can get.
What the Scores Mean
A small business credit score is a model that is used to predict the corporate credit risk of a business going 90 days late on an account within the next 12 months.
A personal credit score is used to depict a consumer’s risk of going 90 days late on an account within the next 24 months.
Business Credit vs Personal Credit Reporting Differences
In the consumer credit world, there are three main reporting agencies. They are Equifax, Experian, and TransUnion. Everyone can get one free copy of their credit report from each of these annually. Furthermore, there are a number of websites that offer free credit monitoring.
In the business world, Equifax and Experian are still players. However, it’s Dun & Bradstreet instead of TransUnion that rounds out the business rating agency list.
The three consumer reporting agencies have generally the same number of records due to them splitting up the smaller reporting agencies between them over the years.
Also, Chapter 13 bankruptcy comes off your credit report seven years from the filing date, while Chapter 7 bankruptcy stays for 10 years from the filing date.
Trade data stays on reports for 36 months. Judgments, collections, and tax liens stay on for 6 years and 9 months. UCC filings stay on your personal credit report for 5 years.
Expect pretty much the same time frames for Equifax Commercial and Dun & Bradstreet. While this isn’t an exclusive list of differences, the largest ones are here.
How Long Does it Take to Establish Business Credit?
It depends. If you do everything in the right order and choose the right tradelines in the beginning, the process will be much faster.
If you are applying for tradelines that are not reporting, they aren’t helping you establish or build credit. That will make the process take longer, as will not setting up your business properly.
Basically, if you follow the steps, it may take a few months. If not, it could honestly take forever.
A Small Business That Has Strong Corporate Credit Will Have Few Funding Issues
Getting a small business credit card to help manage cash flow, expenses, and spending will be easy. Business cards usually have better rewards as well.
A business card can also help when it comes to emergencies or unexpected business expenses.
Getting approval for a line of credit or loan to use as working capital or for a large purchase will be much easier as well.
The key is to start now. Starting yesterday is even better. The faster you get your corporate credit rolling, the better.
Faith is the Senior Content Writer at Credit Suite. She has a BBA with a Major in Accounting and over 20 years of experience in the fields of finance, accounting, and small business credit. She lives with her husband, son, two daughters and two dogs in Tennessee.