How to Build Business Credit: Advice for Your Budding Design Business

While many entrepreneurs use personal assets to get their companies off the ground, establishing good business credit is essential if you intend to secure funding. When you separate your professional and personal finances, you establish your design business as a reliable borrower. Building good business credit will help your firm receive better rates on loans and credit accounts and more favorable payment terms with vendors. Plus, when you master how to build business credit, you'll be extended credit more easily. Creditors and suppliers are increasingly using business credit reports to make lending and credit decisions, according to Experian. Though agencies are notoriously secretive about their precise algorithms, they will definitely consider your business credit history, public records, company size, and length of time that you've been in business. With that in mind, here's the best advice for small organizations on how to build business credit.

Incorporate your business

If you haven't already made it official, the first step is to legally separate your personal and business finances and credit profiles. When you incorporate or create a limited liability corporation (LLC)—rather than working as a sole proprietor or general partnership—you create a legal boundary between your personal and business assets. Once you build business credit, your score will not reflect or affect your personal credit score. It also means that credit and lending won't hinge on your personal credit history.

Establish a phone number and address

It may seem like a simple step, but setting up a dedicated phone number and physical address (not just a P.O. box) for your small business is important in delineating your personal and business finances. Once you've got these established, register with business directories such as the Better Business Bureau; business credit reporting agencies collect information from these organizations. If your company has utility bills, associate your small business telephone number and address with these as well. Paying these bills on time, or early, can help build business credit.

Obtain your EIN

An EIN—or Employer Identification Number—is how the IRS identifies your company. Think of it as a social security number for your business. You'll use it to file your taxes, and suppliers, vendors, creditors, and lenders that report to the business credit bureaus will also use it. Your EIN will be used to track your payment and credit histories.

Start a business credit file

Open a business credit file with at least one of the big players—Equifax, Experian, and Dun & Bradstreet are the best-known, but there are others to consider as well. But first, check to see if you already have one. Some business credit bureaus pull data from public records, and may already have a credit report started in your company's name.

Sign up for a D-U-N-S Number

The Dun & Bradstreet D-U-N-S (Data Universal Numbering System) Number is a unique nine-digit identifier for your business. Applying for one is free, but before you do so, check their database to see if your company already has one. (You might have one already if you've opened a business credit card or taken out a loan.) Unlike an EIN, a D-U-N-S Number is not required by law; however, it is used by many organizations—governments, credit agencies, and other businesses among them—to both track and approve customers and vendors. For example, any company that wishes to contract with the U.S. federal government must have a D-U-N-S Number, and Apple requires one for anyone developing an app. The European Commission (which will find your EIN useless) will want your D-U-N-S Number.

Open a business bank account

To help build better business credit, open a bank account in your company's name, and pay bills from there. This will make it easier for reporting agencies to view appropriate financial transactions, and will also make doing your taxes simpler.

Open a second account (a business savings or CD account, for example) in your company's name. These types of business savings accounts can make it easier to get a small business loan because they show the bank that you're reliable and have backup funds. And, as you repay the business loan, you'll also build more business credit.

Apply for credit

A business credit card is a great way to access instant capital and help spur your design firm’s growth. Be sure that you open one with a large company that reports to the major business credit reporting agencies. Responsible use will help you build credit, which in turn will also help you get a better annual percentage rate on your credit cards. It's OK, and can even be helpful, to have more than one credit card account.

Opening a business line of credit, where funds are accessed via a bank account from which you can withdraw as needed, will help you build business credit, too. A secured business credit card, assured by a deposit that you make against your card, can also help.

Don't overextend yourself

It's imperative to be cautious about carrying too much debt, and to pay statements on time. Business credit reporting agencies keep a close watch on your credit utilization (how much credit your small business has been extended and is using). For example, if you have three credit card accounts, and the balance of each is at its limit, your credit utilization is at 100 percent. Even if you're paying your minimum balance on time, this is not ideal. Many financial experts advise small businesses to keep their credit utilization between 20 and 30 percent.

Be cautious, too, about how many credit cards or loans you apply for at once. Numerous credit inquiries in a short period of time can raise a red flag for lenders and credit bureaus, who may interpret the action as a desperate attempt to obtain capital.

Open trade credit accounts with vendors

When you open a net-30 or similar account with a vendor or supplier, you give your small business some breathing room to pay the bills, but you can also build positive credit. For example, if you follow payment terms that stipulate you'll pay for purchases within 30 days of receipt, you'll build trust not only with that supplier, but also with vendors and suppliers who report to them and possibly with credit bureaus, too. Not all vendors report to credit agencies, though, so aim to work with at least three to five that do. Also, be aware that those that do report may not inform all credit bureaus, so check your credit reports and adjust trade accounts accordingly.

Pay your bills on time

If your company runs into a low cash-flow period, remember that paying bills on time is likely the most important factor in determining your business credit score. If your cash is tied up or you're weighed down by debt, refinancing loans or consolidating debt are likely better options than frequent late payments.

Even better, pay early

Once you've established business credit, continue to build on it. Paying early makes you look good in the eyes of the business credit bureaus, giving you "extra credit," so to speak. Doing so may well help you build up your business credit score faster.

Check your credit report periodically

Once you've opened a business credit file, monitor it diligently to see where your credit score is and to ensure that no mistakes are being reported, which can negatively affect your score. If you do see an error, file a dispute immediately. Also, monitor credit reports from more than one business credit bureau, as a lender or supplier can pull a report from any of the big three.

According to a report by Nav, a company that helps business owners manage their business credit and access financing, nearly 25 percent of businesses aren't clear about why their small business loan applications are denied. Businesses that understand their credit scores, however, are 41 percent more likely to be approved. If you're ready to take your business to the next level, understanding and building your business credit is critical.