New businesses need to build credit because good credit scores make it easier to obtain financing and may qualify them for better terms from vendors.
Regardless of your business’s legal structure, building credit starts with getting your business properly established and opening bank, credit card and vendor accounts.
Paying your bills on time is critical to building and maintaining good business credit.
This article is for new business owners who haven’t established business credit and want tips to help them start building it.
Small business finance often mires personal investment and credit with business purchases and expansion. By establishing a business credit score, you can take an important first step toward creating a dividing line between your business and personal finances, even if you’re running a sole proprietorship or partnership.
What is business credit, and why is it important?
Business credit is a major financial tool for your business. It’s used to help you qualify for loans and other forms of financing. It’s also an essential tool for building relationships with vendors and other business-to-business (B2B) sellers. Business credit can function as a useful bargaining or negotiation tool when you enter into price and service discussions with other businesses. Overall, it’s a major indicator of how healthy and reliable your business is financially. Without business credit, your company will struggle to find loans, apply for credit cards, establish relationships with vendors and succeed as a small business.
Having good credit is always the goal, but when it comes to business credit, it’s also important to understand how bad credit can affect your business. The most impactful aspect of business credit is your ability to secure financing. If you have bad credit, you won’t be able to qualify for loans, credit cards and other types of financing. This can be catastrophic for a new business on the cusp of growth. Yet, according to Nav, 82% of small business owners don’t know how to interpret their business credit score. When you understand your score and maintain it at a high level, you’re on your way to running a successful business.
Here are five benefits of having good business credit:
1. Financing is cheaper.
Having a good business credit score allows you to not only qualify for loans and other financing but also get lower interest rates on those loans. This means the price for borrowing is lower, which, in turn, saves your business money. Especially for loans from conventional banks, having a good business credit score can be one of the most important aspects of obtaining a loan with favorable rates and terms. [Read related article: How to Get a Bank Loan for Your Small Business]
2. Vendors may not require prepayment.
With certain B2B products and services, you may need to prepay. If you have a solid business credit score, these vendors and service providers may not require you to put any money down to get started. That means you can better manage your business’s cash flow when establishing services. While this may seem like a small advantage, this kind of perk can have a major financial impact on your business’s operations.
3. Suppliers and lenders may agree to better terms.
Your credit score can act as a bargaining chip when it comes time to negotiate deals with vendors and suppliers. If you have a good credit score, you may be able to talk down prices, extend contract lengths or, if you’re seeking financing, lower your interest rate.
4. It facilitates the separation of personal and business finances.
One overlooked benefit of understanding your business credit score is the ability to divide your personal and business finances. Small business owners often invest a lot of their personal assets and savings into their business. In many cases, this is the nature of building a small business.
Part of building your business, however, is slowly separating your personal financial commitments from your business financial commitments. By establishing a business credit score, you’re taking one of the most important initial steps in doing this. Especially in a business world where most lenders require their borrowers to sign personal guarantees, having a business credit score can be essential to limiting your personal exposure on business-related ventures.
5. Your business will be financially stable.
Long-term success in business means building on a conservative financial basis and taking risks when new expansion is necessary. To achieve and maintain a good credit score, you need to develop certain financial habits. That means you’ll be saving money, planning your financial future and creating a stable and sustainable company. Having and maintaining a good business credit score means building a successful, long-term company.
Key takeaway: Having a good business credit score has several advantages, including better financing options and vendor terms that ease cash flow.
How to build business credit
The importance of a good business credit score is unparalleled, but how can you build a good credit score from the ground up? The first step is to establish your business legally and file with various business credit reporting agencies. The second step is to develop good financial habits to maintain your credit score. Finally, you’ll want to monitor your score throughout the year to ensure your score accurately reflects the positive financial habits you’re developing.
Here is a detailed step-by-step guide to building business credit:
1. Establish your business.
The first step toward building business credit is to establish your business legally as a sole proprietorship, corporation, partnership or limited liability company. Create a legal name, and set up a business phone number, which will give your company added credibility with vendors and the government. Once the basic legal aspects of your company are created, begin opening accounts with vendors that report to the credit bureaus to establish your business credit file and start building credit. As with legally creating your business, this makes your company known to business credit reporting agencies.
2. Register your business with your secretary of state.
Depending on the type of business you establish as a legal entity, you may have already completed this in step 1. It is important, however, to confirm that you’ve completed all of the steps required by the secretary of state to ensure your business has been registered and created properly.
3. Get your EIN.
Your EIN, or employer identification number, is like your business’s Social Security number; it’s what the government uses to identify your business. Your EIN is also a major piece of information for paying business taxes throughout the year. By requesting this number once your business is registered, you’re gaining a corporate ID number that you will use to file taxes, open a business bank account and apply for business licenses.
4. Open a business bank account.
Get started on separating your business finances from your personal finances by establishing a business bank account. Setting up this type of account will also help you get a business credit card and begin building a relationship with a banking partner that may be beneficial down the road if you need a small business loan to grow your operations.
5. Continue building relationships with vendors.
As you build your business, continue establishing and building relationships with vendors, and create contracts for supplies and other business materials. You build credit by paying on time or early with vendors that report to credit agencies. Not all do, and not all vendors report to the same credit agencies. Consider what your business needs, then look up which vendors in that vertical report to credit agencies.
6. Use your business credit card.
Opening, using and paying off business credit cards is another way to build business credit. Once your bank account is established and your business is in operation, open a business credit card and use it each month. Research which credit card is best for your business. Some cards may offer rewards that can be advantageous for certain types of businesses. Keep in mind that, especially if you’ve just started your business, your credit limit may be rather low when you start out. As you build your credit score, your credit limit will increase.
7. Pay early and often.
One of the most powerful tools you have when building credit is simply paying your bills. By paying your bills in full and on time, you’re proving that you can make good on your debts. If you pay bills early, however, you may be able to build your business credit score even faster. Credit is essentially an agreement between you and a lender that you’ll pay them later for a product or service (or access to money, in the case of credit cards) you need now. So, when bills come due, make sure you pay them. This is the most basic concept behind building credit.
8. Focus on credit utilization.
An important aspect of building a credit score is credit utilization. Much like with personal credit cards, business credit cards have a recommended usage so you can maximize your credit score. It’s recommended that a business owner use no more than 30% of their total credit limit. This proves to lenders that you’re not only financially responsible but more than able to meet your minimum balance each month.
Key takeaway: New businesses can build credit by legally establishing the business, opening credit accounts with a bank and vendors that report to the credit agencies, and paying their bills on time.
How to maintain business credit
One of the most important steps of building a good credit score is maintaining it once you reach the level you want. Paying bills on time or early and establishing good relationships with credit card companies are two of the easiest ways to maintain your business credit score.
However, it’s important to keep in mind that part of building good credit is developing strong financial habits: saving money, paying bills and taxes on time, making informed financial decisions about the future of your business, and developing good relationships with suppliers and other businesses. While these aspects may not directly affect your credit score, they feed into the holistic financial experience your business needs to exemplify.
Another crucial aspect of maintaining your business credit score is monitoring it to ensure it’s accurate. Occasionally, businesses must dispute errors and other issues on their credit report that don’t accurately reflect what really happened with a certain financial transaction. Monitoring your business credit score isn’t difficult, but it’s important to understand the best way to go about doing it.
Where to check your business credit score
Some third-party sites offer companies notifications when their credit scores change at the big agencies. This can be a good option for monitoring your credit score throughout the year. Another option is to check with individual business credit reporting agencies on your own. It’s not complicated to do so, but you may have to register directly with the agencies, which include Experian, Dun & Bradstreet and Equifax.
Key takeaway: To maintain your business credit score, you must continue to build healthy financial habits, such as paying your bills and taxes on time. You should also monitor your business credit score for accuracy.
Having a business credit score is essential to running a financially viable and healthy business. It proves to lenders and other businesses that your company is financially healthy and capable of making important payments. It will not only help you get loans but can also provide you with opportunities to avoid prepayment. As a negotiation tool, a good credit score can help you drive down prices or obtain more favorable interest rates and terms on financing packages from banks and online lenders.
The best way to build credit, once your business is legally established, is to pay your bills on time – and early where possible. By opening credit cards and keeping your credit utilization below 30%, you can further establish a favorable credit rating. Keep building your company’s financial reputation, and check in with the major credit agencies from time to time to ensure your credit score is accurate.
Key takeaway: Building and maintaining good business credit requires you to consistently demonstrate that you are capable of repaying your debts.
After the current U.S. Congress was sworn in, a predictable chorus of merchants, lobbyists, and lawmakers demanded new interchange price caps and other government mandates to decrease credit card interchange fees for merchants. The tired attacks on credit cards are an easy narrative that focuses almost exclusively on the cost side of the ledger, while completely ignoring the cards’ important role in the economy and the regressive effects of interchange regulation.
To lawmakers blindly acting on behalf of retailers, regulation is a brilliant idea—regardless of how it affects their constituents. For decades, they have promised these interventions would eventually benefit consumers. But the lessons from the Durbin Amendment in the United States and price cap regulation in Australia is clear. Although some policymakers bemoan the current economic model, arbitrarily “cutting” rates for the sake of cuts completely ignores the economic reality that as billions of dollars move to merchants, billions are lost by consumers.
For the uninitiated, let’s break down what credit interchange funds: 1) the cost of fraud; 2) more than $40 billion in consumers rewards; 3) the cost of nonpayment by consumers, which is typically 4% of revolving credit; 4) more than $300 billion in credit floats to U.S. consumers; and 5) drastically higher “ticket lift” for merchants.
These are just some of the benefits. If costs were all that mattered, American Express wouldn’t exist. Until recently, it was by far the most expensive U.S. network. Yet, merchants still took AmEx because they knew the average AmEx “swipe” was around $140, far more than Visa and Mastercard.
Put simply, for a few basis points, interchange functions as a small insurance policy to safeguard retailers from the threat of fraud and nonpayment by consumers. Consider the amount of ink spilled on interchange when no one mentions that the chargeoff rate for issuing banks on bad credit card debt exceeds credit interchange.
Looking abroad, interchange opponents cite Australia, which halved interchange fees nearly 20 years ago, as a glowing example of how to regulate credit cards. In truth, Australia’s regulations have harmed consumers, reduced their options, and forced Australians to pay more for less appealing credit card products.
First, the cost of a basic credit card is $60 USD in many Australian banks. How many millions of Americans would lose access to credit if the annual cost went from $0 to $60? Can you imagine the consumer outrage?
In a two-sided market like credit cards, any regulated shift to one side acts a massive tax on the other. For Australians, the new tax fell on cardholders. There, annual fees for standard cards rose by nearly 25%, according to an analysis by global consulting firm CRA International. Fees for rewards cards skyrocketed by as much as 77%.
Many no-fee credit cards were no longer financially viable. As a result, they were pulled from the market, leaving lower income Australians, as well as young people working to establish credit, with few viable options in the credit card market.
Even the benefits that lead many people to sign up for credit cards in the first place have been substantially diluted in Australia because of the reduction of interchange fees. In fact, the value of rewards points fell by approximately 23% after the country cut interchange fees.
Efforts to add interchange price caps would have a similar effect here in the U.S. A 50% cut would amount to a $40 billion to $50 billion wealth transfer from consumers and issuers to merchants. For the 20 million or so financially marginalized Americans, what will their access to credit be when issuers find a $50 billion hole in their balance sheets?
The average American generates $167 per year in rewards, according to the Consumer Financial Protection Bureau. Perks like airline miles, hotel points, and cashback rewards would be decimated and would likely be just the province of the rich after regulation. Many middle-class consumers could say goodbye to family vacations booked at almost no cost thanks to credit card rewards.
As the travel industry and retailers fight to bounce back from the impact of the pandemic, slashing consumer rewards and reducing the attractiveness of already-fragile businesses is the last thing lawmakers and regulators in Washington should undertake.
Proposals to follow Australia’s misguided lead in capping interchange may allow retailers to snatch a few extra basis points, but the consequences would be disastrous for consumers. Cards would simply be less valuable and more expensive for Americans, and millions of consumers would lose access to credit. University of Pennsylvania Professor Natasha Sarin estimates debit price caps alone cost consumers $3 billion. How much more would consumers have to pay under Durbin 2.0?
Members of Congress and other leaders should learn from Australia and Durbin 1.0 to avoid making the same mistake twice.
—Drew Johnson is a senior fellow at the National Center for Public Policy Research, Washington, D.C.
More than ever before, your debt and credit records can negatively impact you or your family’s life if left unmanaged. Sadly, many Americans feel entirely helpless about their credit score’s present state and the steps they need to take to fix a less-than-perfect score. This is where Michael Carrington, founder of Tier 1 Credit Specialist, comes in. Michael is determined to offer thousands of Americans an educated, informed approach towards credit restoration.
Michael understands the plight that having a bad credit score can bring into your life. His first financial industry job was working as a home mortgage loan analyst for one of the nation’s largest lenders. Early on, he had to work a grueling schedule which included several jobs seven days a week while putting in almost 12-hour days to make $5,000 monthly to get by barely.
“I was tired of living a mediocre life and was determined to increase the value that I can offer others through my knowledge of the finance industry – I started reading all of the necessary books, networking with industry professionals, and investing in mentorship,” shares Michael Carrington. “I got my break when I was able to grow a seven-figure credit repair and funding organization that is flexible enough to address the financial needs of thousands of Americans.”
With his vast experience in the business world, establishing himself as a well-respected business leader, Michael Carrington felt he had the power to help millions of Americas in restoring their credit. Michael learned the FICO system, stayed up to date on the Fair Credit Reporting Act (FCRA), found ways to improve his credit score, and started showing others.
The Tier 1 Credit Specialist uses a tested and proven approach to educate their clients on everything credit scores. Michael is leveraging his experience as a home mortgage professional, marketing executive, and global business coach to inform his clients. He and his team take their time to carefully go through their client’s credit records as they try to find the root of their problem and find suitable financial solutions.
The company is changing lives all over America as it helps families and individuals to repair their credit scores, gain access to lower interest rates on loans and get better jobs. What Tier 1 Credit Specialists is offering many Americans is a chance at financial freedom.
Michael Carrington has repaired over $8 million in debt write-ups and has helped fund American’s with over $4 million through thousands of fixed reports. “I credit our success to being people-focused,” he often says. “The amount of success that we create is going to be in direct proportion to the amount of value that we provide people – not just our customers – people.”
Because of its ‘people-focused goals, the Tier 1 Credit Specialist is determined to help millions of Americans achieve financial literacy. It is currently receiving raving reviews from clients who are completely happy with the credit repair solutions that the company has provided them.
Today, Michael Carrington is continuing with a new initiative to serve more Americans who suffer from bad credit due to little or no access to affordable resources for repair.
The Tier 1 Credit Socialist brand is changing the outlook of many families across America. To do this, the company has created an affiliate system that will provide more people with ways of earning during these tough economic times.
As a well-respected international business leader and entrepreneur with numerous achievements to his name Michael Carrington aims to help millions of Americans achieve the financial freedom, he is experiencing today. Tier 1 Credit Socialist is one of the most effective credit repair brands on the market right now, and they have no plans for slowing down in 2021!
Learn more about Michael Carrington by visiting his Instagram account or checking out the Tier 1 Credit Specialist website.
When it comes to personal finance, nothing is guaranteed. That goes double for credit. That’s why, no matter how perfect your credit or how many times you’ve applied for a new credit card, there’s always that moment of doubt while you wait for a decision.
Issuing banks look at a wide range of factors when making a decision — and your credit score is only one of them. They look at your entire credit history, and consider things like your income and even your history with the bank itself.
For example, if you defaulted on a credit card with a given bank 15 years ago, that mistake is likely long gone from your credit reports. To you and the three major credit bureaus, it is ancient history. But banks are like elephants — they never forget. And that mistake could be enough to stop your approval.
But does it go the other way, too? Does having a bank account that’s in good standing with an issuer make you more likely to get approved? While there’s no clear-cut answer, there are a few cases when it could help.
A good relationship may weigh in your favor
Credit card issuers rarely come right out and say much about their approval processes, so we often have to rely on anecdotal evidence to get an idea of what works. That said, you can find a number of stories of folks who have been approved for a credit card they were previously denied for after they opened a savings or checking account with the issuer.
These types of stories are more common at the extreme ends of the card range. If you have a borderline bad credit score, for instance, having a long, positive banking history with the issuer — like no overdrafts or other problems — may weigh in your favor when applying for a credit card. That’s because the bank is able to see that you have regular income and don’t overspend.
Similarly, a healthy savings or investment account with a bank could be a helpful factor when applying for a high-end rewards credit card. This allows the bank to see that you can afford its product and that you have the type of funds required to put some serious spend on it.
Having a good banking relationship with an issuer can be particularly helpful when the economy is questionable and banks are tightening their proverbial pursestrings. When trying to minimize risk, going with applicants you’ve known for years simply makes more sense than starting fresh with a stranger.
Some banks provide targeted offers
Another way having a previous banking relationship with an issuer can help is when you can receive targeted credit card offers. These are sort of like invitations to apply for a card that the bank thinks will be a good fit for you. While approval for targeted offers is still not guaranteed, some types of targeted offers can be almost as good.
For example, the only confirmed way to get around Chase’s 5/24 rule (which is that any card application will be automatically denied if you’ve opened five or more cards in the last 24 months) is to receive a special “just for you” offer through your online Chase account. When these offers show up — they’re marked with a special black star — they will generally lead to an approval, no matter what your current 5/24 status.
Credit unions require membership
For the most part, you aren’t usually required to have a bank account with a particular issuer to get a credit card with that bank. However, there is one big exception: credit unions. Due to the different structure of a credit union vs. a bank, credit unions only offer their products to current members of the credit union.
To become a member, you need to actually have a stake in that credit union. In most cases, this is done by opening a savings account and maintaining a small balance — $5 is a common minimum.
You can only apply for a credit union credit card once you’ve joined, so a bank account is an actual requirement in this case. That said, your chances of being approved once you’re a member aren’t necessarily impacted by how much money you have in the account.
In general, while having a bank account with an issuer may be helpful in some cases, it’s not a cure-all for bad credit. Your credit history will always have more impact than your banking history when it comes to getting approved for a credit card.