We all look at credit scores to keep our personal finances in order, but how do you do this for a business? Business credit is an incredibly important aspect of running any business, especially a small business. But how does business credit actually work, and how does it differ from a normal credit report?
Personal and Business Credit Reports: What’s The Difference?
What is business credit? It is a credit report that is in many ways similar to a personal credit report: it is a document that notes how you handle money and helps lenders estimate the likelihood that you will pay back a loan. Simply put, it measures how good you are with money.
However, there are some notable differences. Aside from the fact that an individual’s finances and a business’s finances can differ, you’ll also have to pay attention to different credit agencies. For personal credit reports, TransUnion and Equifax are the standard providers of reports, but for a business it would be wise to pay attention to Dun & Bradstreet, Experian Business, Equifax Business, and Business Credit USA.
Both businesses and individuals should care about their credit scores for one simple reason—having a good credit score means being able to easily open additional lines of credit, notably when applying for credit cards or loans.
How to Establish Business Credit
There are a variety of ways to establish business credit, many of which are similar to ways that one might establish personal credit. Here are a few examples:
- Incorporate your business. This means moving away from a sole proprietorship, where the business and the owner are effectively the same thing as far as taxes and legality is concerned. Creating a separate entity (like an LLC) is definitely the responsible thing to do.
- Obtain a federal tax identification number (EIN).
- Open a business bank account.
- Establish a business phone number.
- Open a business credit file with all three business reporting agencies: Experian, Equifax, and TransUnion.
- Obtain business credit cards to build lines of credit. You can also establish a line of credit directly with vendors or suppliers.
- Pay your bills on time! This follows the same logic as with personal credit. Show that you can pay off your lines of credit, and your loans and your standing will improve.