Updated: Oct 7, 2022
IS IT POSSIBLE FOR A NEW BUSINESS TO BUILD BUSINESS CREDIT WHEN THEY ARE JUST OPENING?
Yes, it is possible for a new business to build business credit when they are just opening if the business is setup and structured properly. So what exactly does it mean to have your business properly setup and structured? It means....
Business Credit Basics
First things first, with most business credit accounts your personal credit and/or business income will come into play, unless you build your business credit from the bottom, and that is done by opening starting business accounts, called NET 30 accounts. Even if you build your business credit up there may come a time where your business income or credit score will be the deciding factor on whether or not you will be approved.
What is a good personal credit score to aim for in the future?
A 680 or higher personal credit score is required for larger amounts of funding, such as business loans or bank credit cards (Visa, Mastercard, Etc.). If your credit scores are lower than a 680 it's okay as you have time to increase your scores, while you are building your business credit. You can still get approved for business credit, and I explain this more soon.
How much revenue does my business need monthly?
Typically, your business will need to be bringing in at least $3500 monthly through your business checking account. Some creditors may require more. It is said that if your business is only profiting a small amount, such as $2500, it is not a business but a side hustle. So, in the long run it will be beneficial to have recorded income for your business.
Now, when you first get started applying for NET 30 accounts, your personal credit and /or business income will not be a factor, but instead the age of your business. That's one reason why it's important to structure your business properly. You can get access to thousands of dollars of funding with NET 30 accounts, which in turn will set you up for better accounts in higher TIERS later on down the road.
So, if your credit is less than average right now, you can still get access to funding and I am going to explain to you exactly how, but it will be crucial that you also begin the process of repairing your own personal credit, to put your business in position to receive more funding at higher levels.
What are NET BUSINESS ACCOUNTS? (Example: NET 7, NET 30, ETC.)
NET ACCOUNTS are accounts that are due in a net number of days. For example, a NET 30 account would be due 30 days after your purchase, and your business is normally invoiced with the balance being due within 30 days. If it is a NET 60 account that means you will be invoice and billed with a due date of 60 days from the purchase date.
With business credit you will need at least 2 to 3 business accounts reporting before you generate business credit scores. All accounts do not report to each lender so it will be important to open multiple TIER 1 accounts in the beginning to generate your business credit scores.
Business credit scores are different that personal credit scores. Business credit scores normally range from 0-100, with the exception of Equifax Business.
What are TIERS?
TIERS are considered as different levels of credit. You have TIER 1 business credit accounts, which are easier to get approved for and are known credit building accounts. TIER 2 credit cards would be harder to get approved for, and you normally need 5 TIER 1 business accounts before you can get approved for creditors that are considered to be TIER 2.
Let's say you have 3 TIER 1 accounts opened and decided to apply for an account with a TIER 2 creditor, your chances of denial are higher than you chances of approval. It's important not to move to fast and follow the process. Skipping steps during this process may cause you to get more denials than approvals and cause you to doubt the process, so structuring correctly from the beginning and following the tips to build credit in this article will help you successfully build business credit scratch.
Why should I build business credit if my personal credit scores and business income will matter to some creditors?
Simple, because you can still get access to funding that does not require a certain credit score, and when you begin getting access to that capital you can invest it back into your business to grow which should in turn increase the business's income. You'll be surprised to know that you can get access to over $50,000 in funding without using your personal credit or business income.
HOW TO BUILD BUSINESS CREDIT FOR NEW BUSINESSES
STEP ONE - BUILDING BUSINESS CREDIT
When setting up a new business your goal should be to set it up like a Fortune 500 company from Day One!!! With that being said before you decide to go to your secretary of state's website to form your business there are four essential things you will need to do first, and one thing to consider.
Business Address - you will need to have a brick and mortar address, your home address should not be used, even if you do business from home. If you don't have a brick and mortar address, it is ideal and normal to use a virtual business address of your choice. Try to stay away from any P.O. Boxes, UPS, and FedEx addresses.
Business URL - even if you don't having a working website you still need a professional website URL. You can always have a notice present that your website is under construction if it isn't available for full public access. You can also use it to forward to another website, such as your appointment scheduler.
Business Email Address - getting a business URL will give you access to a business email, which is needed when applying for credit and completing paperwork. You will want a professional email address. @Gmail.com, @iCloud.com, @Yahoo.com, Etc. are not considered business email addresses and using them will cause you to get denied for business credit accounts.
Business Phone Number - using a personal cell phone number is frowned upon and should not be used. There are companies available for businesses that offer virtual business phone numbers. You can get a 1-800 number or a local business number. Remember, most individuals don't answer 1-800 numbers, so when deciding what type of number to use, choose what option fits your business model the best.
Generating Income - it is said that your business income may factor into whether or not you are ready to form your business with the state, because once your business is formed you may have yearly business taxes. If you aren't generating income it will be good to have a business plan in place with ideas for the business to start generating income.
STEP TWO - BUILDING BUSINESS CREDIT
Now that all of the essentials are out of the way, it is time for us to get out paperwork in order.
First, you will need to decide how are you going to structure your business. Will it be a single-member LLC, S-Corp, Partnership, Etc. I am not going to get into the details of which one you should choose as that will vary depending on your business income and projected business income. But as a rule of thumb always remember if you are generating at least $50, 000 or more a corporation may not be for you quite yet, if you are unsure consult with an attorney.
After you decide which business structure to use, you will need an Operating Agreement. Whether are not it has to be turned into the the state will depend on your state and chosen business structure. Even if you are a single-member LLC it is important to have an Operating Agreement in place, otherwise your business will have to follow the guidelines of your state in case of emergency, or unforeseeable circumstances. An Operating Agreement may not be required in your situation but it should be taken into consideration under all situations.
Finally, you will need to retrieve an EIN, Federal Employer Identification Number, from the IRS's website. This number is important as it is sort of like your business's social security number, and is needed for a number of things, including filing taxes.
The information on all this paperwork should match. What information you asked. Your business's mailing address, email address, URL, etc. If the information does not match or if you have failed to get all essential items for your business, such as physical address, business phone number, business email address, etc.
FYI: Creating an operating agreement provides an extra layer of protection. It outlines the business' financial and functional decisions including rules, regulations and provisions. The purpose of an operating agreement is to govern the internal operations of the business in a way that suits the specific needs of the business owners.
STEP THREE - BUILDING BUSINESS CREDIT
Now that you have completed the first two steps and have your LLC and EIN, you can head to your bank and open a business checking account. Keeping your personal and business financial separate is a must. A business checking account is also needed when applying for accounts, as some creditors may use AI technology, such as Plaid, to complete and approve your application.
In reality, it is a good idea to have multiple business checking accounts. It is ideal to have a business checking account for all incoming revenue, one business checking account to pay the business's debts, one for quarterly or yearly tax savings, a business checking account to pay employees, etc. So it is perfectly fine to open up an account at different banks.
STEP FOUR - BUILDING BUSINESS CREDIT
Next you will need a Dun & Bradstreet Number, DNB number. This will allow your business to have a credit file once, your scores are generated.
I have heard people say that they have gotten approved for accounts before they ever applied for a Dun & Bradstreet number and it is possible, and it also increases the chances of you having multiple business credit files, spreading your accounts out, making it harder for you to generate a business credit score in the beginning, and may cause confusion with other future accounts.
It normally takes about 30 days to receive your DNB number, unless you have special circumstances which will allow you to receive it sooner, sometimes in less than 24 hours or days.
STEP FIVE - BUILDING BUSINESS CREDIT
Finally, I suggest signing up for a Business Builder account with with Nav. Nav was one of the first accounts I accessed that reported a tradeline to my credit reports. Nav will give you access to three of business credit scores and your two of your personal credit scores. If you choose to sign up for Nav's credit builder account they will report a business tradeline to the main business credit bureaus when you sign up for their Business Builder Account.
*Credit Pro Secret* Businesses can have multiple Business Builder Accounts with Nav, under different email addresses, which can report to the same business. You have open up to five Business Builder Accounts with NAV.
Now, that we have taken the time to get our business structured and properly setup now we can begin to open our first NET account. The best to NET 30 accounts to start with are Uline and Grainger. I have never heard about a time that they did not report, and their criteria isn't excessive. They are fairly easy to get approved for.
Now if you can open up those two accounts and make some purchases, and you add NAV, it is possible to generate business credit scores in as little as 30 to 60 days. Quill is also another option for a NET 30 starter business credit card, and remember if you don't like what the stores are offering it's okay these accounts are only needed to start you off.
Gas business credit cards are also another great option when building business credit and they are fairly easy to get approved for, especially if your business has active monthly revenue. Examples of great gas cards are the AtoB business gas credit cards, Shell, BP, Raceway, Fuelman, etc.
If you utilize NAV, you will know when your business generates business credit scores. Remember you must have 2 to 3 business credit accounts reporting before your business will generate a credit score, but once your business has credit scores, you can move on to TIER 2, and you will also be able to get approved for the Sam's Store Credit Card and/or the Sam's Club Mastercard. You will also be able to get approved for auto loans without having to PG, which means personally guarantee or use your personally credit or show proof of your business income.