Updated: Dec 30, 2022
When starting a small business, failing to plan is planning to fail. While you may have a great product and service that you plan to offer, without business credit, your small business is bound to hit roadblocks. One way to overcome this obstacle is by planning to establish business credit.
You must take steps in a particular order to ensure the process of establishing business credit goes smoothly. Having been through this process ourselves as small business owners and business consulting experts, we will walk you through the steps to take and the order in which you need to take them to ensure your small business has the funds it needs to perform optimally.
Although you must actively work to build business credit, thankfully, it’s one of the things you can do for your small business easily and quickly, as the process is much faster than building consumer credit scores.
First Step to Establishing Business Credit
The business builds its credit profile and credit score with business credit. Business credit is credit obtained in a business's name, and with an established credit profile and score, your small business can qualify for credit lines. Fortunately, this credit is based on the business's ability to pay and not the business owners- since the business qualifies for the credit.
The first thing you need to do is establish your business as a separate legal entity. While there are many benefits and ease to choosing sole proprietorship, it comes with the burden of being personally responsible for all the businesses’ losses and liabilities. This is one reason why we recommend an entity structure such as a limited liability company, or LLC. With an LLC, personal liabilities remain separate from your small business, similar to how a corporation operates. Additionally, using an LLC protects you from being personally sued should the worst-case scenario occur.
Once you’ve set up your small business structure, head over to the IRS website and get a tax identification number for your business, this is also known as an EIN (Employer ID number), and it will be used to help you file for all necessary licenses Sam'sand permits. Your EIN is also crucial to begin building a business credit profile with the major credit reporting agencies.
Apply for Credit In Your Company’s Name
Once you’ve properly formed your small business following the steps above, you must apply for credit in your company’s name. As a new startup or existing business with little to no credit identity established, below we’ve listed the basic types of business credit you can easily acquire.
Business Credit Cards
While we are all familiar with credit cards, did you know that business credit cards are essential to keep your personal and business purchases separate? Unsecured business credit cards report only to business credit agencies, protecting your credit as you build your small business.
We highly recommend Divvy, the first company to offer King's Dream a line of credit when we started! That money made a world of difference in funding our marketing efforts.
Divvy makes it easy to access the funding you need, no matter the size of your business. Apply for a credit line in seconds and start spending smarter.
Vendor credit is one of the key parts of the process of building business credit. Utilizing vendor credit, you can obtain products or services your company purchases on short-term financing. Sometimes, a vendor may require an initial purchase or deposit to establish credit terms.
A plethora of brand retailers offer store credit cards for small businesses. A few examples are Costco, Sam’s Club, Shell Gas, and Circle K. This type of business credit is perfect if you plan to shop at them for your small business regularly. Typically, the card is only authorized for the retailer unless it is co-branded.
We consider this the easiest form of business credit to establish for the first time. Service credit includes internet, electric, gas, cell phone, cable, web hosting, and other utility services your company makes with providers.
Looking to conserve cash flow? Supplier credit is a great option for business credit. This type allows a supplier to provide supplies to your business and defer the payment. In this way, you can use the supplies to help sell your products before paying, which is a win-win for new businesses.
Benefits of Establishing Business Credit
The benefits of business credit are abundant, including building a credit profile for your business that is completely separate from your personal credit profile. You create double the borrowing power with an established business credit profile and your personal credit profile.
Business credit scores are based solely on whether the business pays its bills on time. You may not know that you can build business credit faster than personal credit. You can still build your business credit quickly regardless of personal credit quality. Additionally, approval limits are much higher than personal accounts, ranging from 10-100 times higher than consumer credit. The business can then use credit to qualify for credit cards from major retailers such as Visa, MasterCard, and credit lines and loans.
When done correctly, you can build business credit without a personal guarantee. Plus, you can get a lot of business credit without taking on personal liability, keeping your personal assets safe in case of default.
Business Credit is Necessary for Financing
Business credit is always reviewed whenever you apply for financing. Not having established business credit will get you denied the financing your small business may need in the future. No regulations require lenders to notify a small business of reasons for their denial, keeping small business owners in the dark about why their business was denied financing. One last reason why it's important to establish business credit is that it establishes the financing rate and term someone pays and how much they will receive upon approval.
Whether you're looking to grow your small business, or build a new start-up, establishing business credit is a necessary step in the planning process.
Unsure how to help your small business get off the ground and run? Contact us today for a free small business consultation.
About The Author
Kristin Burke is a small business marketing expert, author, and urban gardener. As a former food truck owner of Chicago's first schnitzel truck, she has first-hand knowledge of launching a small business successfully. She has been a writer for various small business blogs since graduating from the University of Chicago in 2008.