A new firm or startup might use first-time business credit to leverage money for future development prospects and swiftly raise its total worth.
Why bother establishing business credit in the first place?
A firm with business credit has better cash flow. Cash flow is a company’s most valuable asset and protection. Business credit allows a company to get cash that may be used to purchase products and services, pay personnel, and pay debts. Businesses might struggle and even collapse if they do not have access to money, which includes leveraging business credit. There are several reasons to establish company credit.
Reasons why a company would desire to develop business credit include:
Purchase necessary equipment. A company may wish to buy equipment that will save it money in the long run while also allowing it to develop quicker in the immediate term.
Ensure long-term viability. A corporation with a lot of cash can weather economic storms far better than one with little resources and no access to financing. A corporation may continue to operate even if it is not profitable by keeping reserves of money on hand.
Establish business contacts. Partnerships with other firms (e.g., vendors, suppliers, manufacturers, merchants, other business people, etc.) are used by businesses to obtain a competitive edge and dominate their markets. Relationships are based on trust, which is earned when a company repays its obligations and keeps its commitments, allowing all parties to gain.
Value will rise. The greater a company’s corporate credit, the more desirable it is to investors and potential purchasers. Keep this in mind while you learn how to build a business plan so that you may swiftly increase the worth of your company.
Avoiding First-Time Business Credit Mistakes
It is critical for first-time company owners to properly establish business credit. Too frequently, when establishing company credit for the first time, business owners make costly errors that impact their business credit ratings and total worth.
Here are a few examples of these errors:
Failure to create a legal business entity: You’ll need a legitimate business structure (such as a limited liability corporation (LLC)) to obtain business credit. This manner, your personal assets and credit are separated from your company assets and credit. You want to maintain them distinct so that one does not harm the other (for example, if your company is sued, you do not lose your life savings, house, and other personal things).
Neglecting net-30 suppliers who report to commercial credit bureaus: Many businesses may offer you a net-30 account, but the issue is whether they will submit your payment history to business credit agencies. You are not developing business credit if those tradelines are not recognised on your business credit reports.
Uncertainty about how company credit ratings are calculated: Did you know that just paying your creditors on time every month will not result in a great business credit score? You must pay on time, but there are additional things to know regarding company credit ratings.
Failure to build credit properly: There is a method for creating business credit. Most business owners do not follow this method and, as a result, harm their company’s credit.
Instructions for Establishing Your First Business Credit
To create and develop company credit, a step-by-step procedure must be followed. To prevent committing errors, follow these instructions.
Create an LLC
The first stage in establishing business credit is to create your company as a distinct legal entity. This entails incorporating a corporation or a limited liability company (LLC). We suggest studying how to form an LLC since corporations are sophisticated organisations that are often used by bigger businesses.
Determine Fundability
Your company must be fundable in order to qualify for business finance. This entails getting your ducks in a row and doing the following:
Obtain an Employer Identification Number (EIN) (EIN).
Purchase a business phone line with a 411 directory listing.
Have a tangible business location and address (as opposed to a P.O. box, UPS mailbox, or virtual office location).
Ensure that your business address appears on all business paperwork, filings, and so on.
Ensure that your company’s name appears exactly on all business papers, such as registration and formation paperwork, secretary of state filings, business licences, and so on.
Create a website that contains all of your pertinent information.
Have an email address connected with your company’s website domain (not a @gmail.com or @yahoo.com email address, but a @yourdomain.com email address).
Establish a business bank account.
Collaborate with firms that assist in the development of company credit.
Set up Net-30 accounts with vendors that report to business credit bureaus.
Net-30 accounts are credit lines extended to companies by suppliers. You should be aware of the following facts concerning net-30 vendors:
Accounts that are net-30 must be paid within 30 days of the invoice date.
Pay as soon as possible. The sooner you pay these bills, the better your credit score will be.
Only certain net-30 merchants report to credit bureaus, while others do not.
Generally, you should conduct business with net-30 suppliers that report to commercial credit agencies. How do you determine which suppliers report? You may and should ask any vendor you’re thinking about doing business with whether they report, how often, and to which business credit agencies.
Create Store Credit Card Accounts
Since you now have a six-month history of recorded tradelines on your company credit reports, it is time to arrange new lines of business credit. You will most likely qualify for in-store credit cards at this stage. These cards provide revolving lines of credit, which may boost your business’s credit rating even further.
Request a Working Capital Loan
Apply for a working capital loan after six months have elapsed. This is a bank-issued line of credit that you may utilise to support your company as needed. You pay interest solely on what you spend.
The advantages of this form of financing are numerous:
Increases financial flow. Use the funds to pay wages, invoices, and other expenses associated with running your firm. This prevents you from spending the funds in your company bank account.
Only pay interest on what you spend, not on the line of credit.
Maintain exclusive ownership of your company. A working capital loan might be the difference between staying the only owner and having to bring on partners (e.g., venture capitalists).
Obtain financing more quickly and easily. Working capital loans are short-term loans that need just a few documents to be completed in order to be accepted.
There is no requirement for collateral to qualify. Working capital loans are unsecured lines of credit that do not require you to put up security. This implies you are less likely to lose assets you currently own.
Builds company credit more quickly. Banks report to credit agencies on a regular basis, ensuring that tradelines appear on your Dun & Bradstreet, Experian Business, and Equifax Small Business credit reports.
Request a Secured Business Credit Card
Business credit cards are classified into two types:
Secured commercial credit cards (i.e., you pay a deposit, usually the amount of the credit card limit)
Unsecured commercial credit cards (That is, there is no deposit; the credit line is determined by your company credit profile and business credit ratings.)
There are many benefits to applying for a secured business credit card:
You receive all of the benefits of a standard business credit card (e.g., rewards, points, discounts, insurance, cashback, purchase security, etc.)
Business credit card businesses provide information to business credit bureaus. This implies more credit under your control, which benefits your credit score.
Get an unsecured business credit card without providing your Social Security number.
Maintain better recordkeeping. Credit card statements make filing your company taxes simpler for you and your CPA.
Increase your cash flow. With the possibility of utilising your secured business credit card, you can better control your money.
Apply for a Business Unsecured Credit Card
Apply for an unsecured business credit card a year after you’ve begun using your secured business credit card. This way, you won’t have to apply with your Social Security number, which might harm your personal credit score. You may instead apply with simply your EIN number.
An unsecured company credit card has the following benefits:
Credit line expansion. Card providers often offer a credit limit equivalent to the greatest line of credit previously acquired with unsecured business credit cards. This implies that if you have a net-30 vendor who has handed you a $50,000 check as a result of your excellent relationship with them, your unsecured credit card amount will be $50,000. This is a great method of boosting your credit quantity, providing additional prospects for your organisation to flourish, and so on.
Employees should have their own cards. These cards are trackable, assist you in better managing your company finances, and guarantee you take advantage of tax savings throughout tax season.
Increase the worth of your company. If you decide to sell your company, having an unsecured business credit card tied to it immediately tells investors and purchasers that you know how to manage and maintain a firm effectively.
Summary
Learning how to set up company credit for the first time might be a daunting undertaking. There are several factors to consider. The directions presented here are based on proven concepts.
Here’s what you should keep in mind:
Consider a firm to be a two-sided value equation: The one side is concerned with making a profit for your company. The other side is concerned with establishing company credit (i.e., business fundability). Investors assess companies based on both sides of the equation. This is why establishing corporate credit is just as crucial as generating revenues.
Follow these steps in the following order:
Create an LLC
Determine your company’s financial viability.
Create net-30 accounts.
Apply for business credit cards in-store.
Request a working capital loan.
Request a secured business credit card.
Request an unsecured business credit card.
Learn to handle company credit as rigorously as you do your business.
Pull company credit records on a regular basis. We suggest once a month, at the very least every a quarter. Make sure your grades are improving. Check that your information is valid and that suppliers are reporting on a frequent and accurate basis.