Despite thorough planning, running a business can often come with unexpected expenses. May it be an equipment repair or advertising funds to keep up with the competition, surprise expenses are a part and parcel of every business. Not having funds to cover the necessary costs can put a business at risk of falling behind or even shuttering down. It is for times like these, that a healthy business credit can help you secure that much needed loan. This post outlines five strategies for building your business credit.
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Establish your business as a separate entity. By forming a corporation or a Limited Liability Company (LLC), you will separate your business credit history from your personal one. This is a protection that flows both ways, so that negative events in one credit history will not adversely affect the other. After establishing the corporation or LLC, request a federal Employee Identification Number (EIN) from IRS.Gov. Having an EIN allows you to open a business bank account and vendor accounts and is required on federal tax filings. The last item is to get a phone in the name of the business and list it with the local directory. Whether this is a cellphone or land line, having a separate phone number allows banks and suppliers to complete their verification process for credit lines.
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Open a business bank account. Using the legal business name, open an account at a bank you trust. Deposit all payments made to the business into this account. Use this account to pay all of the business invoices and to obtain any start-up equipment needed; pay for smaller purchases with a debit card attached to this account. Use this account also to make monthly payments on any credit card accounts you open. But always be aware of your bank balance and never overdraw your account.
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Obtain business credit accounts. Your business credit builds more quickly by using credit accounts with companies that report to credit bureaus, such as the major credit card companies and large chain stores. If you buy office supplies on a regular basis, consider opening an account at one of the large chain office supply stores. Purchase gasoline for the company car with a company credit card or establish a credit line with a major gasoline company. Some smaller vendors, such as bottled water suppliers, allow 30 days to pay. Creating even these small accounts and paying them monthly helps build credit.
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Make payments on time and pay off your balances each month. Your business credit score benefits from payments made on time or early. Late payments impact your business credit history negatively, so plan ahead to be prepared when payments are due. Be aware that maxing out credit cards and vendor accounts damages your business credit score; instead, keep your spending level closer to 25% of your total credit limit with each account. Then pay off the balance in full each month to keep your credit score healthy.
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Open a business credit file. Open a business credit file with Dun & Bradstreet, Experian, Equifax, and/or Transunion. Update your business information whenever there are changes such as years in operation or number of employees. Some credit bureaus, including Dun & Bradstreet, also allow you to upload financial statements. Since a credit score changes often, monitor your business credit score frequently. Look for completeness and accuracy of information, watch for who is inquiring about your credit, and keep track to prevent business identity theft. Reviewing the credit file also points out strengths and weaknesses in your business credit history and can point you toward building even better creditworthiness.
Starting a business is an exciting endeavor. By following these five strategies, your business will build credit and open the door to lower-interest loans, better vendor terms, and a healthy future.
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