How to establish credit and improve your scores

I have been in business for myself three years now, and when I started, I never thought about establishing business credit. Like many small business owners, I relied on the strength of my personal credit to fund my business. But when you use personal credit, your mortgage, auto loan and personal credit cards affect your ability to qualify for a business loan. Using business credit separates your personal activities from that of the business. Your business credit is dependent on your company's payment history, assets, cash flow and other financials.

The credit bureaus that monitor business credit are not the same three that monitor your personal credit. Experion monitors business and personal credit, but the scores are somewhat different. Business credit scores run from 1 to 100, with 100 representing the best score. Equifax offers a “Small Business Credit Risk Score,” which ranges from 101 to 992. Dun & Bradstreet is the other bureau that monitors business credit. Its credit scores range from 101 to 670. Building your business credit can take some time, but it will make you eligible for better offers from creditors.

To start building your business credit, here are some steps you should take:

Set up a Business Entity

It's important to realize that a sole proprietor can't apply for a business loan or business credit; sole proprietors can only get personal loans, whether they need that money to hire a software developer or buy a new car for personal use. In order to receive a business loan or investment, you need to separate the business from your personal finances, and this means setting up a legal business entity such as a corporation (C Corporation or S Corporation) or LLC. Your CPA can advise you on the best legal structure for your particular situation, as your choice in entity can have some pretty significant implications on your taxes.

Get a Tax ID Number (EIN) and open a business bank account

Just like each individual has a social security number, every business must have a tax ID number (also called the EIN). This is a nine-digit number assigned by the IRS to business entities operating in the United States. You will use this number to open your business bank account, and it's the basis for building your business credit profile. You can apply for your business EIN online through the IRS site - it's fast, simple and free.

Register your business with the three credit bureaus

For your Experion and Equifax credit report, you can use your Federal Identification Number (EIN). Dun & Bradstreet requires a special number, called the D&B or DUNS number that rates your credit profile. You can apply for free online through its website once you've established your business entity and have your EIN.

Start establishing business credit

Obtain business or trade credit with vendors and suppliers that are able to report your company's payment history to the various business credit bureaus. While opening new credit cards isn't always advisable, you should consider opening a credit card in the name of the business and use it wisely. This means keeping your balance low and always making your payment on time. You can also lease or finance equipment for your business. When you lease equipment — whether a computer or factory equipment — the debt is a secured loan, which means the owner can repossess the item if you default on your loan. Equipment dealers are more likely to work with new businesses because of this.

It is extremely important that the corporate information you report to all three business credit reporting companies is identical. Consistency is critical when building your corporate profile. Erroneous information will be reported twice and this can diminish your chances of establishing business credit.

Maintain good personal credit and a High FICO score
While the whole point of establishing business credit is to separate your business and personal activities, your personal credit will still come into play. If you are a relatively new or small company, creditors will want to look at your personal credit (or the personal credit of any shareholders with more than 15- 20% ownership of the company).

Personal credit scores range from a low of 300 to a high of 850 on the Fair Isaac Corp. or FICO scoring model.

WHAT'S IN MY FICO SCORE?
The FICO Score is calculated from several different pieces of credit data in your credit report. These data are grouped into five categories as outlined below. The percentages reflect how important each of the categories is in determining how your FICO Score is calculated.

1. Payment History - 35%
2. Amounts Owed - 30%
3. Length of Credit History - 15%
4. New Credit - 10%
5. Types of Credit Used - 10%

Your FICO credit score is calculated based on these five categories. For some groups, the importance of these categories may vary. For example, people who have not been using credit long will be factored differently than those with a longer credit history.

You can improve your credit score by following the below:

Pull your credit report and look for factors that could be affecting your score. Look for errors in the report, such as accounts that aren't yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn't be reported any longer.

After repairing errors, the fastest route to a better score is paying down balances on credit cards.

If you've paid your bills late in the past, you can improve your credit score by paying every bill on time from now on.

One thing you should not do if you're trying to boost your score is close unused accounts. This will change your utilization ratio. Try to get the usage on all of them to less than 40%, if not lower.

The most important thing to remember is you can't build business credit overnight. Savvy business owners should be thinking about their business credit from day one. Even if you don't need a loan right now, you never know what challenges or growth opportunities will develop down the road.

Cheryl O'Neill Gowen is president and CEO of Alternative Funding Options. She works with business owners seeking cash flow from non-traditional sources, drawing on more than 30 years' experience in banking, financing and staffing. Contact her at: [email protected].