Like many startups and small businesses, you may find yourself in the position of bootstrapping your company’s finances when you’re getting started—and for an indeterminate period of time thereafter. Sure, securing venture capital or finding investors to inject a ton of cash into your business is a great goal, but you need to start somewhere. And in order to secure any sort of financing for your small business—beyond cash you may have saved up and investment from family and friends—you’re going to need to build up good credit for your business so that lenders will be willing to take a chance on you. So, how does a small business build credit?
Separate Business from Personal
A crucial step towards building good credit for your business is to separate your personal finances from your business finances from the get-go. Maybe you’ve already got great personal credit, but that doesn’t mean a loan officer is going to feel like they can lend your company money. That being said, if your business is small and relatively new, lenders will likely take a look at your personal credit—and the personal credit of any other owners/shareholders in the business—nd have you sign a personal guarantee before extending credit.
While you’re opening your business bank account, it can be a good idea to see if your bank offers any credit-building products aimed at small businesses, such as credit cards or lines of credit. As we saw in a recent post about good debt versus bad debt, you need to exercise a certain degree of care with credit cards, whether they’re for business or personal use. Make sure not to carry too high of a balance, and always make your payments on time. These payments are reported to credit bureaus and contribute to building up your credit score, which is what potential creditors will look at when you apply for other financial products down the road.
Make it Official
There are a few steps you can take to establish your business as its own entity and make it look more professional in the eyes of potential lenders (as well as avoiding any overlap or confusion between your personal credit and business finances on the credit bureau). How you choose to organize your business is one way to do this.
Companies that do business in the U.S. can also register for an Employer Identification Number (EIN) through the IRS and/or a Dun & Bradstreet (D&B) Number (also known as a DUNS number). An EIN is like a Social Security Number for your business, helping to set it apart from your personal finances and give it its own unique identity for the credit bureau. Dun & Bradstreet is a business credit bureau, so potential lenders may use them as a tool to assess your business’ creditworthiness.
Keep Clear Records
If your business is new and hasn’t yet built up much of a credit history (or any credit history at all), lenders may ask to see additional documentation to help them decide whether or not to extend credit to your business. In addition to showing that you have a solid payment history on any credit cards or lines of credit, you’ll also want to have a clear record of your company’s assets and cash flow. This means keeping track of your balance sheet, revenue statements, employee payroll (if applicable), and bank statements. Having the right cloud accounting software can help you to get started with centralized and streamlined bookkeeping.
Keep in mind that a financial advisor can be a great resource when it comes to understanding your business’ credit report and making key financial decisions. While the content of this post does not constitute financial or legal advice, it hopefully gives you a good start for building your business’ credit!