Having good business credit is essential for any LLC to succeed. Good business credit allows a company to secure loans, access better terms and interest rates from vendors, and even help attract investors. Unfortunately, building strong business credit isn't as easy as it sounds. However, with the right strategies and tools in place, it can be achieved.
In this guide, I'll walk you through how to build business credit for your LLC so you can take advantage of all these benefits.
By the end of this guide, you will have a clear plan on how to build excellent business credit for your LLC.
How To Establish Business Credit For LLC
Here are the steps to establish business credit for your LLC.
Know the Right Type of Business Structure
The first step in setting up a successful business is deciding what type of structure it should have. For example, knowing what is an LLC (limited liability company) and why it is a great structure for small businesses can help you decide if this is the right option for your business. Some structures include a sole proprietorship, partnership, LLC (limited liability company), S-corp, or C-corp. Each structure has its advantages and disadvantages depending on the size of your business and how much control you want to retain over it. Make sure to research them before deciding which one is best for you.
Applying For An EIN
Once you've chosen a structure, it's time to apply for an Employer Identification Number (EIN) from the IRS. This nine-digit number allows businesses to file tax returns, open bank accounts in their name, and apply for necessary permits/LLC licenses. The IRS offers a helpful tool that makes applying for an EIN relatively straightforward. All you need is basic information about your company, such as its name and address.
Opening Up A Business Account
Once you have received your EIN, opening up a company-specific account will help keep personal finances separate from any professional expenses. This ensures clarity of balance sheets further down the line. Also, establishing credit with vendors who report information can help build on credentials even more by bolstering rating scores. Regular monitoring of all three major Business Credit Reporting Agencies helps protect against errors or fraud within accounts.
Secure Your Business's DUNS Number
Getting a business credit score is essential to staying competitive in today's economy. You must request your own DUNS number to tap into this important tool. Completely free of charge! This nine-digit identifier allows lenders and other businesses to quickly assess your company's financial standing before entering any transactions with you. Additionally, it doubles as an application requirement for federal grants, adding even more incentive behind securing that all-important DUNS number.
DUNS stands for Data Universal Number System, a unique nine-digit code that identifies your business in the marketplace. It works similarly to how Social Security numbers identify individuals, only that companies use them instead of people. A DUNS number is assigned by Dun & Bradstreet (D&B), the world's leading business information and insight provider, and can be requested directly from their website.
Having a DUNS number not only gives lenders and other business entities access to your company's financial standing but also ensures that all data associated with your business is up-to-date.Additionally, if you ever apply for a federal grant or contract, you will need to have an active DUNS number to be considered eligible, making it even more important! Knowing your current credit score can also help you monitor any changes over time, allowing you to make informed decisions regarding its improvement.
Use Trade Credit To Help Your Business
Trade credit is a great option for businesses wanting to increase their inventory without having to pay upfront. Not only does this arrangement mean easier cash flow for companies, but it also allows them to boost their business credit score if all payments are reported correctly. Even small vendors such as water or office supplies distributors can be listed as references on accounts even if they don't report information directly to bureaus.
Trade credit is when one company gives another company goods or services now with the expectation that the other company will pay for them later. This arrangement helps businesses increase their overall inventory and enable more sales to be conducted in a shorter period. It also allows companies to keep up with customer demands while avoiding the need for large upfront payments on goods and services received.
If you require additional goods or services that you cannot immediately afford, trade credit could be an excellent option. Additionally, suppose your suppliers require payment within 30 days, but you know that it will take longer than that for you to generate sufficient income from sales. In that case, trade credit may be an appropriate solution.
Utilizing trade credit is especially beneficial if you know that you can repay the vendor within 60 days or less and want to establish good relationships with suppliers to ensure ongoing access to products and services at competitive prices.
Use Online Lenders To Build Your Business Credit
Building a strong business credit profile is essential for any business looking to take the next step. Before approving a loan, banks and other conventional lenders frequently demand years of experience and excellent credit, but there are other options. By taking advantage of online small-business lenders who report payments and balances back to business credit bureaus, you can build your credit profile quickly and easily. Let's dive in and explore how this works!
When you borrow money from an online lender, the lender will usually report your payments and balances to the major business credit bureaus. This is important because it helps build your credit profile by demonstrating a good track record with payments. That, in turn, makes it easier for lenders to trust you when it comes time for them to consider giving you additional financing.
In addition to reporting payments and balances, some online lenders also offer tools to help you manage your finances more effectively. As such, they're a great way to build your credit and develop better financial habits that will serve your business in the long run. For example, some online lenders offer free software that can help you track expenses or invoice customers on time.
It's always important to ensure that all of your finances are organized before applying for financing so that these tools can be incredibly helpful along the way!
Why It's Important To Manage Your Business Credit
Staying on top of your business credit is essential for any business owner. The accuracy and integrity of your company's data are important factors that influence the potential trust customers, partners, and suppliers have in your business.
Managing your business credit means ensuring accuracy and consistency across all reporting agencies. This includes ensuring that all accounts are accurately listed and that you pay all bills on time to maintain a good credit rating. You should also monitor the reports regularly for changes or inconsistencies and investigate any discrepancies you may find swiftly to avoid impacting future prospects with inaccurate information.
Monitoring your business credit starts with requesting copies of all three major bureaus' reports: Dun & Bradstreet, Experian, and Equifax. These reports will provide detailed information about the accounts associated with your business, including the creditor name, account status (open or closed), balance due, payment history for each account, collections and bankruptcies, lines of credit offered by lenders, etc.
You should review these reports for accuracy. If there are discrepancies between them or any information appears outdated or incorrect, contact the respective bureaus as soon as possible to correct them. Additionally, you can sign up for free services such as D&B Credit Signals or Experian Small Business Services, which provide ongoing alerts when your reports change, such as new inquiries or delinquencies, so that you can stay on top of it easily and quickly.
The importance of monitoring your business credit cannot be overstated, as it not only helps protect against identity theft but it also plays an essential role in helping maintain positive relationships with lenders, vendors, and other creditors who rely on accurate data when deciding whether they want to do business with you
Furthermore, having up-to-date reports could potentially help save money since it allows you to take advantage of better interest rates from creditors who offer them based on higher ratings. This could result in significant savings over time which could be used towards growing your business!
What Is Business Credit Reporting And How It Impacts Your Score
Business credit reports are essential for assessing a company's financial health. When vendors, suppliers, or creditors report a business's accounts and activities to a credit bureau, they help build the foundation of invaluable insight that shapes the overall business credit score. Reports may also draw from an owner's data and reliable sources like Small Business Financial Exchange for accurate results. Understanding how business credit reporting works is key for small business owners who want to ensure their score accurately reflects their financial situation.
A credit report includes information from various sources, such as public records, lenders, and suppliers, about your company's payment history and trade references. It also contains more detailed information about the company's finances, including its assets, liabilities, and other financial statements. Additionally, it can include contact information, the ownership structure of the business, legal proceedings (if any), related companies (if any), and bankruptcies or liens.
Business credit scores are based on the same criteria used by lenders when considering loan applications, primarily payment history (accounting for 35% of the score) and debt-to-income ratio (accounting for 30%). Other factors that contribute to your score include available cash flow (25%), amount of time in business (10%), and the number of inquiries made on your report (10%).
A good credit score will give businesses access to lower loan interest rates and better terms from suppliers, which can help reduce costs over time. It can also streamline processes such as opening new accounts with vendors or obtaining insurance coverage quicker.
When it comes to LLC costs, reducing risks, and building your business's reputation, paying close attention to your company's credit score is essential. Taking the time to understand how business credit reporting works and why it's important can have a major impact on the success of your business for years to come.
Establishing Good Credit: The Benefits For Businesses
As a business owner, you are responsible for ensuring your company's financial health. One of the most effective ways to do this is by establishing and maintaining good credit. Good business credit gives access to opportunities that can offer long-term rewards for companies looking to expand their reach and operations. Let's examine some of the benefits of having good business credit.
Access To Loans And Lines Of Credit
Businesses with solid credit scores can take advantage of better loan terms from banks or other lenders when it comes to financing. Companies with good credit are more likely to be approved for loans and lines of credit and access lower interest rates and longer repayment periods – all of which can help a business manage its cash flow more efficiently.
Businesses with strong credit scores may also receive higher levels of trust from potential investors or lenders, which could open up additional growth opportunities.
More Favorable Payment Terms With Vendors
Good business credit also gives you leverage when negotiating payment terms with vendors or suppliers. Instead of having to pay upfront in full, companies with strong credit profiles may be able to negotiate payment plans that are more favorable to them, such as net 30 or even net 60 terms (whereby you only need to make payments after an agreed-upon period).
This extended timeline can provide businesses with much-needed cash flow relief during tight finances.
Lower Insurance Premiums
In addition to providing access to capital, good business credit can also help lower insurance premiums across the board, from general liability insurance policies to executive coverage plans. Since insurers use a variety of factors, such as company size, industry, and location, to calculate premiums, demonstrating your company's solid financial standing could result in lower premiums for all types of coverage plans.
Understanding The Difference Between Personal And Business Credit
With so many similarities between personal and business credit, it's easy to confuse them. While these financial tools can be used to acquire loans or lines of credit, several key differences separate them. Knowing how they differ is important for anyone looking to build a strong financial foundation for their business.
The most obvious difference between personal and business credit is that they are two distinct entities. While your individual borrowing history will factor into your business credit score calculation, lenders treat each type of credit as a separate entity to avoid cross-contamination between them. This ensures that your finances remain unaffected if your business experiences difficulties with its debt obligations.
Another key difference between personal and business credit is that each type has its own eligibility requirements. For instance, when applying for a loan or line of credit, you must provide proof of income to qualify.
However, with business credit, the focus shifts away from individual income and onto the company's financial performance. This means lenders will look at factors such as sales volume, customer payment history, and other metrics when determining an applicant's eligibility for a loan or line of credit.
How To Best Utilize Credit For Your Business
As a business owner, having good credit is essential. It opens the door to better terms and more manageable cash flow. One way to take advantage of your good credit is using a business-specific credit card. With a business-specific card, you can reap the benefits of grace periods and avoid interest charges.
It's important not to get too carried away when it comes to relying on your business-specific credit card; after all, carrying balances on multiple accounts could mean paying much steeper rates than what traditional lines of credit offer.
Moreover, carrying heavy debt loads can negatively impact your personal and professional credit scores, which could affect your ability to secure additional financing down the road when you need it most! Therefore, it is vital to always ensure you understand the terms associated with each type of loan/line of credit before committing, as it will ensure no surprises further down the road!
How To Build Business Credit For LLC - FAQ
Yes, it is possible to get business credit with an LLC. Depending on the specific lender and requirements, they may require additional documentation, such as a personal guarantee or assets as collateral. This can be done to protect their investment should the business not repay the loan.
Additionally, many lenders report payments and balances to major business credit bureaus, which can help establish and improve a business' credit profile over time. This is especially important for small businesses that may not have much of an established credit history.
A good business credit score for an LLC can vary depending on the specific lender and the types of loans being applied for. Generally speaking, a score of 680 or higher is considered to be in the "good" range. This means lenders are more likely to approve loan applications from businesses with a score in this range. That said, it's important to note that lenders look at various factors when evaluating loan applications, including credit history and other financial metrics.
Alternative business credit for an LLC is a type of financing that does not involve traditional banks and lenders. This includes peer-to-peer lending, invoice financing, merchant cash advances, crowdfunding campaigns, angel investors, and venture capital. These alternatives can benefit businesses that may not qualify for traditional loan products due to insufficient or low credit scores.
Additionally, the application process for these products is often quicker and less stringent than those for traditional loans. However, before committing to any financing, knowing any associated fees or interest rates is important.
Establishing and maintaining good business credit is instrumental in optimizing your company's financial health. Good business credit opens up doors not only for borrowing money but also allows businesses greater flexibility when negotiating advantageous payment terms with vendors or suppliers.
These opportunities offer long-term rewards for companies looking to expand their reach and operations. While it takes time, dedication, and effort – the benefits are well worth it!
Further reading: Want to know more about forming an LLC?
Here are a few articles to check out: