Establishing Business Credit as a Startup

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Before you start the credit building process as a startup it's essential that you meet corporate compliance so your company is considered 'credit ready'. The reality is commercial banks and lenders have not loosened borrowing so a business has to prove its creditworthiness with strong credit history.

With regard to this, many business owners depend on personal financing to fund their businesses which means that mortgages, personal credit cards, and auto loans affect the ability of a business to qualify for a business loan and also determines the amount of a loan. Here are several key steps to get 'credit' ready so your company can start the process of obtaining credit.

Set up a Business Entity

Sole proprietors do not qualify for business credit and loans. At their position, they can only borrow personal loans. The personal loans can be used for business or personal purposes. To receive business loans, one has to separate the business from personal finances which mean he/she will have to start up a Corporation or Limited Liability Company.

Get a Tax ID Number

Similar to individuals having social security numbers, all businesses should have a tax ID number. The number is used to open bank accounts and forms a basis for building a business credit profile. The number can be easily applied online and is free.

Open a Business Bank Account

To build credit, a business needs to have a bank reference. The bank account should be at least two years old when applying for a loan. It’s advisable to open a bank account as early as possible in a business life. The bank account should reflect an average daily balance cash flow that will be capable of improving the business debt level.

Get Listed With Business Credit Bureaus

Business credit bureaus run their own credit score. They give a business a different credit file number that is used to rate the credit profile of the business. The number is used by lenders to determine the creditworthiness of the business. Most of the lending companies check a company's business credit report during the loan application process. Businesses should work on building a good score while monitoring their business credit file with D&B and other agencies.

Establish Business Credit History

Just like personal credit scores, the more vendors report a good payment history, the better the business credit will be. In most cases, small vendors do not report to reporting companies so a business should maintain a trade reference sheet that should have a minimum of three trade references which include their name, credit limits and contact information.

Keep up to Date With Taxes

File business taxes in a timely manner to ensure compliance. Failure to comply will have a negative effect on business credit. Businesses should file returns on time and pay what the business owes. In the case of a tax payment problem, they should seek the advice of tax experts.

Maintain a Good Personal Credit Rating

Even if the business is a separate entity, personal credit still has an impact on various types of business financing. If the company is small or new, the creditors look at the personal credit of the shareholders. Those with a share percentage of more than 20% need to watch out for their credit ratings since the lenders may use their personal scores to determine the creditworthiness of the business.

Types of Credit Available

  • Business credit cards - It is a convenient way of establishing a positive credit rating, however, a business owner should pay close attention to the terms and conditions of the card.
  • Seasonal commercial loans - They are suitable for businesses that have an inventory that fluctuates according to the seasons.
  • Term loans - They are the most common commercial loans. They have fixed rates that are paid monthly or quarterly and have a set maturity date.
  • Installment loans - These loans require repayment through regularly scheduled payments over the life of a loan. The loan term can be few months or extend to even 30 years.
  • Business lines of credit - They offer high credit limits and lower interest rates compared to credit cards. They give large amounts of money but are restricted to businesses that are two years and older.
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