Building business credit for LLC makes it easier and less expensive to get the funds and supplies you need to grow your business. If you’re looking for ways to build your business credit, here is a step-by-step guide you can follow.
First, it is important to understand that operating a business as a sole proprietorship does not legally separate you, as the business owner, from your business. This means that your personal and business transactions will be reflected in your credit report. This can limit your business from acquiring more capital and can drag your credit scores when the business suffers from debt.
Therefore, it is recommended to separate your business credit from your personal account. You can do this by registering your business with the right business structure. As an LLC, LLP, or corporation. For this article, we will focus on how to build business credit for LLC, the best entity for small businesses.
Once you have registered your business as an LLC, you are ready to start building your business credit. Here are the things you can do.
1. Obtain an EIN.
To start building your credit, you need to get EIN for your business. This is a federal tax identification number that served as a security number for a business. EIN is required for tax filings and to open a business bank account for LLC.
2. Open a Credit Card for your Business.
A good and easy way on how to build business credit for LLC is getting a business credit card. It does not require employees or an office and most business owners can qualify for it as long as the owner has good credit.
A business credit card is helpful to keep personal and business expenses separate. Therefore, it’s important to use business credit cards only and for all your business transactions. Do not use it for your personal expenses as it can only make tracking difficult.
Aside from being a stepping stone to building business credit, getting a credit card for business has many advantages. You can get cash backs, travel rewards, or welcome bonuses. Moreover, business credit cards have higher credit limits than personal credit cards. And some credit card issues offer low introductory APR periods. This allows you to make large purchases and build business credit without worrying about high-interest rates.
You can get one or more credit cards for your business. However, avoid getting many business credit cards in a short period of time as this can negatively impact your credit score.
3. Establish credit with vendors who report to credit bureaus.
Get your supplies from vendors who report to business credit agencies; Dun & Bradstreet, Experian Business, and Equifax Business. Take note of “vendors who report to business credit agencies” as some do not and this is one of the most common mistakes businesses make. It is best to ask about this first before getting an account with vendors. You don’t want to waste money, time, and opportunity to build business credit for your LLC.
You can get Net-15 or Net-30 days accounts on vendors. This means getting the products, services, or supplies you need to be paid for within 15 or 30 days.
4. Keep your credit utilization ratio (CUR) low.
CUR is the percentage of the amount you borrowed divided by your total credit limit. It is a key factor in building business credit as it signifies your company’s financial strength. Having high credit utilization ratio can drastically result in low credit scores as it indicates you are sucking up your credit limit to meet your needs. To build a good business credit score, it is recommended to keep the CUR under 30%.
5. Pay your bills on time.
Credit history is the most important factor in your credit reports. It influences your credit score and tells vendors your capacity and sense of responsibility in paying loans. Always pay on time and in full amount to avoid a negative impact on your business credit reports. Even just a few days of late payments will be reflected on credit reports. For instance, 2 days late payment will mark 2 DBT, which means 2 days beyond terms, on your credit history.
6. Monitor your credit score.
Building credit can take several months to a few years. Monitoring your credit score can alert you to any problems that may occur. For instance, accounts that don’t belong to you or late payment remarks for loans that have already been paid. So, you can make the necessary corrections by contacting creditors or filing a dispute with credit bureaus. You can use credit repair software to monitor your credit and make fixing credit easier.
If you are building business credit for your LLC or for your clients as a business, having a business credit builder software is handy to make your work easier. Check out Business Credit Machine to learn more.