How to open a credit file for a new business

We at Bankrate field many questions about business credit development, especially from new and young entrepreneurs. For example, one lucky young woman’s parents gave her a substantial sum to launch her startup, but she’d never had a credit card or a loan of her own before. All she had was her time as an authorized user on their account. Would it be enough to start a credit file for her business? Yes.

When it comes to opening a business credit file, here’s what she and other emerging business owners should do to get started:

Open a designated deposit account

First, work to keep your personal finances separate from your business finances so that you can streamline your bookkeeping. Open a checking and savings account at a bank or credit union that’s specifically for your business, and deposit any funds that you plan to use.

Having a designated business checking or savings account for deposits will help you stay organized when it comes to accounting and taxes. Plus, when you get credit accounts that are connected to your business, you’ll be able to draw from the funds in your deposit account to make your payments.

Start as a sole proprietor

The structure of your business typically determines whether you need to create a business credit file. Many entrepreneurs start as sole proprietors, and many remain with that status throughout their business ownership.

By starting as a sole proprietor, you can then decide if you need the additional protections or other factors that come with different business structures. If you decide that you want to remain a sole proprietor, that means there will be no legal difference between you and your enterprise. In that case, your consumer credit file will also work for your business affairs.

When you apply for business credit products, the lenders will check your Equifax, TransUnion and Experian credit reports. The credit scores that are derived from them will determine eligibility and set terms.

If you have credit products like credit cards in your name, you have a consumer credit file. Even if you don’t, though, a consumer credit file may have already been started for you. You may be an authorized user on someone else’s credit card, for example, or have student loans or be associated with a car note. To find out, go to the government site annualcreditreport.com to order and review your free weekly credit report.

Assuming you have a consumer credit file, you also have credit scores, such as FICO Scores and VantageScores, so check them too. They range from 300 to 850, with higher numbers preferable for future creditors because they indicate less credit risk.

Apply for a business credit card

When you know where your credit stands, you can apply for the right credit product in your name. You might think that a personal card you use only for your business would work out fine, but you might actually be better off with a small-business credit card that you never use for personal expenses. These cards are rich with benefits tailored to meet the needs of entrepreneurs and small business owners.

There are a tremendous number of business cards on the market, and as long as you earn money independently, you can apply for a business credit card. Be aware that you will need to prepare more information for a business credit card application than for a personal credit card. You may have to list the name of the business, the industry you are in and how much your business makes. Compare and contrast the benefits and rewards for each card, as well as the credit requirements, before completing an application.

If you don’t qualify for an unsecured business credit card, consider a secured business credit card. The credit lines are usually the same as the deposit, so if you put down $500, that’s your charging limit. With regular and responsible use, your credit rating should increase, putting you in the position to qualify for or graduate to unsecured credit products later.

With this strategy, you won’t necessarily have to establish business credit before applying for a card. Lenders can base their decision on your consumer credit profile. Then, once you have a business credit card, you can potentially start building business credit by using it responsibly. There would be nothing more for you to do except keep all the accounts in good standing by paying on time and ensuring a low credit utilization ratio. Just remember that what you do with these business credit cards can affect your personal credit.

Transition into a business credit file when ready

If your business is established as or will be transitioning into a separate legal business entity, such as a limited liability corporation (LLC), partnership or corporation, then you’ll need to start a business credit file if you don’t have one already. The specifics of how to open a business credit file are laid out for you below.

In addition to the designated business bank account, you’ll need to get an Employer Identification Number from the IRS and a separate business phone number.

Also, apply for a D-U-N-S number, which is a nine-digit number connected to your business. It will help you build your business credit history.

Commercial credit reports are developed by Dun & Bradstreet, Experian Business and Equifax Business, and they house the information only from your company’s credit products and business affairs. Be aware that a business credit file may have already been developed if you have business loans or if other entities have financial dealings with your company. Check before opening a duplicate credit file.

When you have credit products like business loans or credit cards in your company’s name, the lenders will send the activity with them to the commercial credit reporting bureaus, which will, in turn, become part of your business credit file.

Be aware that only companies with a legitimate business purpose can pull your consumer credit reports, but business credit reports are publicly available, so anyone can check.

Your business credit report will list:

• Business identification information and mailing address
• Business structure and any partnerships and subsidiaries
• Financial data about your business
• Credit cards, loans and collection history associated with your business
• Trade credit transactions, if suppliers allow you to buy now and pay later.
• Any liens, judgments and bankruptcies associated with your business

Just as with consumer credit reports, the information on these reports is scored, and those risk scores will also be on your business file. To build healthy business credit, prioritize paying what you owe on time since some scoring models only use payment history as a factor. There are a variety of business credit scores, and most range from 0 to 100, while the FICO Small Business Scoring Service (FICO SBSS) ranges from 0 to 300.

Borrow and repay the right way

Whichever type of credit card you get, treat your accounts carefully. You need to:

• Make all of your payments on time. All lenders want to be sure that you will meet the terms of the contract, and the most important one is on-time payments.
• Be prudent with the amount you borrow. You do not want to get into excess debt and then have to struggle with high payments and expensive interest.
• Contact the lender if you find yourself in trouble. All businesses have rocky times. There may come a point when bills are due, but you don’t have the revenue to cover them. In that case, contact the credit issuer and request help before you fall behind.

Remember, all your credit accounts will be recorded on your file, whether it’s on your consumer or business credit reports. That information will be pertinent to other lenders and vendors with whom you want to do business. Therefore, everything on your reports should reflect positively on you and your company’s health.

And if you don’t have the advantage of a cash influx that the young entrepreneur had from her parents? Try to build a savings account that you can dip into when business problems arise. You’ll be glad you did.

The bottom line

Opening a credit file for a new business doesn’t have to be some complicated process, and in some cases, it isn’t even a necessary one. If you’re a sole proprietor, you likely don’t need to do this, but if your business is structured another way, like as an LLC, then this step will be necessary to show potential lenders that your business is in good standing.

Once you’ve gotten your EIN and a designated business account, you can start working with business lenders who will contribute information to your business credit file. Just don’t forget to handle your debt responsibly by making on-time payments and not borrowing more than you can afford to repay.