Building your business credit is the backbone of your business. You can then t efficiently establish good credit before you ever set up your business! Get a business telephone number, a fax machine and have it registered at the local bank. Every reputable business needs to have one. Then you will also need to open up a business bank account in your business name, and regularly pay all your bills with this account.
If you have a business credit history, you may need to regularly get reports from your business credit reporting agencies. They may need you to update your addresses or other details on time. If you are new, they may need you to do this more frequently as the rates and fees for doing so vary from one reporting agency to another. You may need to make an application to get an updated address and contact information. The report that they will give you will contain updated information, which makes it easier to locate you when you need to make a payment.
To establish business credit history, you need to know that you have a legal entity. For example, if you are a sole proprietor, you must have started it as such. Similarly, you may have to incorporate your business. To do this, you must get the formal approval of your chosen employer identification number, or EIN.
Sole proprietorships are different from corporations and LLCs. When you are a sole proprietor, your assets are divided among the owners. This means that any debts that you accumulate will not affect your ability to make payments on your business credit products. However, if you have employees, any debt they incur will separate them from the company and will therefore affect your ability to make payments on your business credit products.
Corporate entities are different from sole proprietor businesses. Corporate entities are separate legal entities from the people who own them. Because of this, they are treated as financial vehicles by many lenders. If you have a corporate credit history, lenders may view you as less of a credit risk than someone who owns their own business. This means that your score will be elevated and your business loan applications and other types of credit may be approved by lenders.
To understand business credit scores, you first have to understand business credit reporting. Every business that accepts credit card transactions is required to submit reports of its credit score to one or more of three major credit scoring companies. These companies are Experian, Equifax, and TransUnion. Each year, these companies publish their findings in a report that is called the CRAs. Knowing how to establish good credit scores is crucial to your business financing needs.
The . . . . . . purpose of these reporting agencies is to provide borrowers with accurate information about their credit profiles. Your business credit score is determined based on several factors. One is your debt-to-income ratio. Other factors include your current level of debt relative to your current assets. Businesses can improve their current level of debt-to-income by making every business credit payment on time and paying off the balances as they settle.
One important factor that lenders look at is the number of business credit cards accounts that you have open. If you have a large number of business credit cards with low balances, your business credit score will likely be lower than if you have a smaller number of accounts and high balances. This is one reason why business owners get “credit checks” from reporting agencies. The reporting agencies will report the credit utilization percentage of each account to the credit reporting bureaus. A good business credit score is important because it provides financial institutions and other potential investors with an accurate depiction of your ability to manage your business's finances.