How to open a credit file for a new business

We receive numerous inquiries at Bankrate regarding business credit development, particularly from new and young entrepreneurs. For instance, one fortunate young woman received a generous sum from her parents to kickstart her startup, but she had never possessed a credit card or loan of her own. All she had was her time as an authorized user on their account. Would this be sufficient to establish a credit file for her business? Yes.

When it comes to initiating a business credit file, here’s what she and other emerging business owners should undertake to begin:

Open a designated deposit account

Initially, ensure to keep your personal finances separate from your business finances to streamline your bookkeeping. Open a checking and savings account at a bank or credit union specifically for your business and deposit funds that you plan to utilize.

Having a designated business checking or savings account for deposits will aid in maintaining organization when it comes to accounting and taxes. Furthermore, when you obtain credit accounts linked to your business, you can utilize the funds in your deposit account to make payments.

Start as a sole proprietor

The structure of your business typically determines the necessity of creating a business credit file. Many entrepreneurs commence as sole proprietors, and many continue with that status throughout their business ownership.

By initiating as a sole proprietor, you can later decide if you require additional protections or other factors that come with distinct business structures. If you opt to remain a sole proprietor, there will be no legal differentiation between you and your enterprise. In such a scenario, your consumer credit file will also suffice for your business dealings.

When applying for business credit products, lenders will review your Equifax, TransUnion, and Experian credit reports. The credit scores derived from them will determine eligibility and terms.

If you possess credit products like credit cards in your name, you already have a consumer credit file. Even if you don’t, a consumer credit file might have been initiated for you. For verification, visit the government site annualcreditreport.com to order and assess your free weekly credit report.

Assuming you have a consumer credit file, you also possess credit scores, such as FICO Scores and VantageScores, so ensure to check them too. These scores range from 300 to 850, with higher numbers being preferable for future creditors as they indicate lower credit risk.

Apply for a business credit card

Once aware of your credit standing, proceed to apply for the appropriate credit product in your name. While using a personal card solely for business expenses might seem feasible, opting for a small-business credit card exclusively for business use is more advantageous. These cards offer tailored benefits to meet the requirements of entrepreneurs and small business owners.

There is a vast array of business cards available, and as long as you earn income independently, you are eligible to apply for a business credit card. Be prepared to furnish more information for a business credit card application compared to a personal credit card. Details such as the business name, industry, and revenue may be required. Prior to submitting an application, compare and contrast the benefits, rewards, and credit requisites of each card.

If you do not qualify for an unsecured business credit card, consider a secured business credit card. The credit limit typically matches the deposit amount, so if you deposit $500, that becomes your spending limit. By utilizing the card responsibly and consistently, your credit rating should improve, positioning you to qualify for unsecured credit products in the future.

With this approach, establishing business credit before applying for a card is not mandatory. Lenders can base their decision on your consumer credit profile. Subsequently, upon acquiring a business credit card, you can commence building business credit by utilizing it responsibly. Your primary focus should be to maintain all accounts in good standing by making timely payments and maintaining a low credit utilization ratio. Bear in mind that your actions with these business credit cards can impact your personal credit standing.

Transition into a business credit file when ready

If your business is structured as or will transition into a separate legal entity, such as a limited liability corporation (LLC), partnership, or corporation, creating a business credit file becomes necessary if not already established. The detailed steps for opening a business credit file are outlined below.

In addition to the designated business bank account, obtain an Employer Identification Number from the IRS and a distinct business phone number.

Apply for a D-U-N-S number, a nine-digit identifier associated with your business. This number aids in building your business credit history.

Commercial credit reports are compiled by Dun & Bradstreet, Experian Business, and Equifax Business. These reports exclusively encompass information from your company’s credit products and business transactions. It is important to verify if a business credit file already exists, especially if your company has existing financial engagements. Avoid duplicating credit files.

Once you possess credit products like business loans or credit cards in your company’s name, the activity associated with them is reported to commercial credit bureaus, subsequently becoming part of your business credit file.

It is worth noting that only companies with a legitimate business purpose can access your consumer credit reports. Conversely, business credit reports are publicly available for examination. Your business credit report will feature:

• Business identification information and mailing address
• Business structure, partnerships, and subsidiaries
• Financial data related to your business
• Credit cards, loans, and collection history linked to your business
• Trade credit transactions, if suppliers offer credit terms
• Any liens, judgments, or bankruptcies associated with your business

Similar to consumer credit reports, the information on business credit reports is scored, with those risk scores reflecting on your business file. To cultivate healthy business credit, prioritize timely payments as some scoring models emphasize payment history. Various business credit scores exist, with most ranging from 0 to 100, while the FICO Small Business Scoring Service (FICO SBSS) spans from 0 to 300.

Borrow and repay the right way

Regardless of the type of credit card you acquire, manage your accounts diligently by:

• Ensuring timely payments: Lenders seek assurance that you will adhere to the contract terms, with on-time payments being paramount.
• Borrowing prudently: Avoid accumulating excessive debt that may lead to financial strain due to high payments and interest costs.
• Communicating with the lender in case of financial challenges: Businesses encounter fluctuations, and if you foresee challenges in meeting financial obligations, reach out to the credit issuer to seek assistance before falling behind.

Remember, all credit accounts, whether on consumer or business credit reports, are recorded and impact your overall credit standing. Therefore, ensure that all information on your reports portrays you and your company positively.

For those without the financial advantage enjoyed by the young entrepreneur who received parental funding, consider building a savings reserve to address business exigencies. This proactive step can prove beneficial in challenging times.

The bottom line

Initiating a credit file for a new business need not be overly complex, and in some instances, it may not be obligatory. Sole proprietors typically do not necessitate this step, but for businesses structured differently, such as LLCs, establishing a business credit file becomes crucial to demonstrate to potential lenders that your business is reputable.

Upon obtaining your EIN and a designated business account, engage with business lenders who will contribute information to your business credit file. Remember to manage your debt responsibly by making timely payments and borrowing within your means.