Building business credit is a crucial step for any small business owner looking to secure financing and establish a strong financial foundation. Unlike personal credit, which is tied to your Social Security number, business credit is linked to your business’s Employer Identification Number (EIN) and is a measure of your company’s creditworthiness. Here’s how to establish and improve your company’s credit to better your chances of getting funding and with better terms.

Establishing Business Credit: The Starting Line

Understanding the Difference Between Personal and Business Credit

As an entrepreneur, you’ll want to start building business credit early and the key to do that is understanding how it differs from personal credit. Your personal credit score is tied to your individual financial history, whereas a business credit score reflects the creditworthiness of your business entity. Small business owners often start with their personal credit to fund their business. However, establishing business credit can offer advantages such as better interest rates, higher credit limits, and reduced personal liability when considering business loans.

Register Your Business and Get an Employer Identification Number

To establish credit for your business, you must first set up your business structure. If you form a Limited Liability Company (LLC) or a corporation, your business becomes a separate legal entity with the ability to have a credit score. Ensure your business is registered with the IRS and obtain an Employer Identification Number (EIN), a nine-digit number that acts like a Social Security number for your business.

Open a Business Bank Account

A business bank account is fundamental to separating your personal finances from your business expenses. It also shows lenders and credit bureaus that your firm operates as a business.

Start with Vendor Credit

Trade credit, also known as vendor credit, is when a supplier allows your business to buy now and pay later. These trade lines can establish a credit history with manageable payment terms, contributing positively to your business credit score when reported to business credit bureaus like Dun & Bradstreet, Experian, and Equifax.

Fast-Tracking Your Business’s Credit Building

Establish Trade Lines with Companies That Report Credit

To build credit swiftly, work with suppliers and vendors that report your payment history to the major business credit reporting agencies. This is especially true for startups who have even less of an established credit rating. Not all companies do this, so it’s essential to choose those that do.

Consider a Credit Card

When you use a business credit card, it can be a tool for building your business’s credit profile, which can be beneficial for securing future loans and lines of credit at potentially better rates, but it may also affect your personal credit history.

Pay On Time or Early

On-time payments are critical for a good business credit score. Early payments can be even more beneficial, as some scoring models, such as the Dun & Bradstreet PAYDEX score, give higher scores for early payments.

Credit Reporting Agencies: The Beacons of Your Business Credit

Register with Dun & Bradstreet for a DUNS Number

To create a business credit file, you’ll need a DUNS number from Dun & Bradstreet, the most prominent business credit reporting agency. This number is essential for building your business credit profile and is often required by lenders and vendors.

Monitor Your Business Credit Report Regularly

Your business credit report contains information about your business credit history and is used by lenders to determine your creditworthiness. Monitoring your report allows you to ensure accuracy and track your progress in building your credit.

The Long Journey: How Long Does It Take to Build Business Credit?

Building a strong business credit score doesn’t happen overnight. Typically, it can take a year or more of establishing a credit history and making consistent, on-time payments to build a credit profile that will be attractive to banks/lenders.

The Role of Merchant Cash Advances in Business Financing

Alternative to Traditional Loans

Many small business owners turn to small business loans, but if you are just starting our and haven’t built enough business credit to be consider for an SBA loan then a merchant cash advances is a great solution to consider. MCAs offer a significant advantage as they provide funding based on a share of future revenue. As long as you have a business checking account and revenue of $8K or more, this is an excellent option.

Less Emphasis on Credit Scores

Merchant cash advances are not loans but are an advance against future earnings. Therefore, providers often place less emphasis on credit scores and more on your company’s cash flow, making them more accessible for new businesses.

Benefits and Risks of Merchant Cash Advances

Immediate Access to Capital

Merchant cash advances can provide rapid access to capital, often within a single business day, which is much faster than loans that can take weeks or months.

Daily Repayments

The repayments of a MCA are made daily so that they are smaller, and more manageable than a larger monthly payment which can also impact your business’s cash flow

No Impact on Business Credit Score

Merchant cash advances do not typically affect your business credit score since they are not considered a loan. However, they also don’t help build your credit profile as they are not reported to credit bureaus.

Conclusion: Why Build Business Credit?

Building business credit offers a myriad of benefits, from protecting personal credit to accessing better financing options. With a strong business credit score, you’ll have better leverage when it comes to negotiating terms and rates with providers and lenders. Although it requires patience and discipline, establishing a solid credit profile for your business is an invaluable investment in your business’s future.

For the small business owner, merchant cash advances can be a strategic funding option, especially in the early stages when building credit. They provide the necessary capital to grow without the constraints of bank loans or the need for a perfect credit score.

Remember, the path to a robust business credit is built on a foundation of responsible financial behavior, strategic planning, and a thorough understanding of how credit works. By following these steps and being mindful of your credit practices, you can set your business up for financial success.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.