Building Business Credit as a Small Business Owner
Monday, August 12, 2024
Welcome to the J&S Accounting Blog! Today, we're diving into a crucial topic for small business owners: building business credit. Whether launching a startup or growing an existing business, understanding how to establish and leverage business credit is not just vital for success, but also empowers you to take control of your financial future.
What is Business Credit?
Before we get into the steps for building business credit, let's clarify what business credit is and how it differs from personal credit.
Business Credit vs. Personal Credit
Personal Credit: This records an individual's financial history, including credit card usage, loans, payment history, and credit inquiries. It is tied to your Social Security Number (SSN) and tracked by credit bureaus like Equifax, Experian, and TransUnion. Personal credit scores range from 300 to 850, affecting your ability to secure personal loans, credit cards, and rental agreements.
Business Credit: Business credit records a company's financial history and creditworthiness. It is tied to your Employer Identification Number (EIN) rather than your SSN and is tracked by business credit bureaus such as Dun & Bradstreet, Experian Business, and Equifax Business. Business credit scores vary depending on the reporting agency but typically range from 0 to 100. Strong business credit can help you secure better financing terms, lower interest rates, and improve your company's reputation with vendors and suppliers.
Why is Business Credit Important?
1. Separation of Finances: Separating personal and business finances not only simplifies accounting and tax preparation but also provides a crucial layer of security, protecting your personal assets in case of business financial difficulties.
2. Access to Funding: A strong business credit profile can help you secure a business loan with a lower interest rate, a business credit card with a higher credit limit, or negotiate better payment terms with your suppliers.
3. Cash Flow Management: Good credit can improve cash flow by allowing you to purchase inventory and services on credit, giving you time to convert sales into cash before making payments. This can bring a sense of relief and stability to your business operations.
4. Vendor Relationships: Suppliers and vendors are more likely to offer favorable terms to businesses with good credit scores.
Steps to Build Business Credit
1. Incorporate Your Business
Structure your business as an LLC, corporation, or partnership to create a legal entity separate from yourself. This is crucial in establishing business credit independent of your personal credit.
2. Obtain an EIN
Apply for an Employer Identification Number (EIN) from the IRS. This is necessary for tax purposes and for opening a business bank account.
3. Open a Business Bank Account
Open a business checking account to separate your business finances and maintain clear financial records. Use this account for all business transactions. Why You Should Keep Your Business Finances Separate
4. Register with Business Credit Bureaus
Ensure your business is registered with major business credit bureaus. Dun & Bradstreet, for instance, assigns a D-U-N-S number, which is essential for building your business credit profile.
5. Establish Trade Lines
Build relationships with vendors and suppliers that report to business credit bureaus. Ask for credit terms and make timely payments to build your credit history.
6. Apply for a Business Credit Card
Choose a business credit card that reports to business credit bureaus. Use the card for business expenses and pay the balance monthly to build a positive credit history.
7. Monitor Your Business Credit Reports
Regularly check your business credit reports from the major bureaus to ensure accuracy and to understand your credit standing. Correct any errors promptly to maintain a healthy credit profile.
8. Maintain Good Payment History
Pay all your business bills on time or early. Payment history is a significant factor in your business credit score, so timely payments are crucial.
9. Keep Your Debt Levels Low
Manage your debt levels carefully. High debt levels can negatively impact your business credit score. Aim to keep your credit utilization ratio low.
Conclusion
At J&S Accounting, we're here to support you in every step of your business journey. Feel free to contact us for personalized advice and expert bookkeeping services.
Building business credit is not a one-time task but an ongoing process that requires diligence and financial discipline. By following these steps, you can establish and strengthen your business credit, paving the way for economic opportunities to help your small business grow and thrive.
About J&S Accounting
J&S Accounting offers full-service bookkeeping, payroll, and consulting services. Our team understands that well-organized financial records help your business run more efficiently. We are a woman and minority-owned accounting practice improving the financial management of small businesses and nonprofits in Savannah, GA and nationwide.
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Disclaimer
This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business from a professional accountant. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. J&S Accounting does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. J&S Accounting does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers and viewers should verify statements before relying on them.
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Disclaimer
This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business from a professional accountant. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. J&S Accounting does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. J&S Accounting does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers and viewers should verify statements before relying on them.