Though it is tempting for sole proprietors and small business owners to use their personal credit, creating a credit history for the business itself is an important step in establishing yourself. Suppliers and lenders will all want to know that you are reliable and will likely run their own credit checks before signing contracts or allowing you to run up a credit balance.
If you’ve already established yourself as a separate entity, then you can check your credit online for free and see what potential creditors do. Having a solid credit score for your business has numerous rewards, including the ability to qualify for better payment terms from suppliers and better interest rates on loans. If you haven’t created a separate entity for your business, start by applying for a Federal Tax ID. Once you’ve done that, you can follow the steps below to start building credit and boosting your company’s credit score.
Business credit agencies are different from personal credit agencies. Once you have a D-U-N-S number you can register with the business credit agencies so that suppliers and vendors can report your financial behavior and you can begin to build a business credit profile.
The faster you pay your invoices, the better your credit score will be and the more trust you will accrue with potential lenders and suppliers. In business, it is not enough to simply avoid paying late. You will be rewarded by paying better and faster than the creditors’ terms.
Paying on time and being a responsible customer is always the right thing to do, but if the suppliers that you are working with fail to report this data to the credit agencies then it won’t help your business profile. When you’re about to begin doing business, ask the supplier or lender whether they report payments. If the answer is no, either ask that they do so or – if they refuse – choose another supplier who will.
When you’re starting out, a loan can really help you get established and grow. However, after you’ve gotten yourself a solid footing it’s a good idea to limit the amount of available credit you use to boost your credit utilization ratio. This statistic reflects the amount of credit you use compared to what is available to you. The better your ratio, the better your credit score will be and the stronger your financial standing will be in the eyes of creditors.
It’s a good idea to keep all your personal finances completely separate from your business finances. That means separate checking and savings accounts, separate loans, and separate credit cards. By keeping these different aspects of your life in their own lanes, you make it much easier on yourself in case the business begins to struggle financially.
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them." He is active in the community and belongs to the AICPA and the VSCPA.
