The 411 on Building Business Credit
If you’re like me, you probably have a small business and are looking for ways to grow it. You may need money to hire employees, pay for necessary expenses, market and expand your business, or you’re working hard to set yourself up for success. One of the best things I can recommend that will help you thrive during your business journey is to build up some credit.
But how do you go about doing that as a new or existing business? What is business credit? How is business credit different from personal credit? And what’s the best, safest, easiest and most cost effective way to establish and build business credit?
As a business owner and entrepreneur myself, I’ve bult 3 different businesses over the past 10 years. I’ve made a lot of mistakes and learned a lot of lessons in this time, and one of the biggest regrets I have was not learning more about and working on my business credit early on.
So you want to establish business credit?
If you’ve arrived at this post, I can only assume you want to establish, learn more about, or build business credit. Some see business credit as the holy grail of financial success, and for good reason: It can help you get low-interest loans and finance big purchases like cars and equipment. But not all businesses are created equal in terms of their ability to get approved for financing, especially if they lack a longer track record, have poor personal credit, or have no prior experience working with financial institutions.
In this informative article, I’m going to give you a whole lot of food for thought about business credit: What it is, how to use it, and tell you the best way to build credit for your small business in 2023.
So lets dive right in.
What is Business Credit?
Business credit is a line of credit that a business can use to make purchases. Your business can use this credit to buy things like inventory, equipment, and pay for other expenses.
Now, while your personal credit does affect your ability to obtain lines of business credit, business credit differs from personal credit in that the lines of credit are higher (much higher in some cases) and it is attached to your business more so than your personal credit profile.
How else does it differ from personal credit?
Business credit differs from personal credit in that it’s typically issued by a third party to help a company finance its operations. Personal credit, on the other hand, is issued directly by lenders such as banks or department stores and helps individuals finance big purchases like homes and cars.
Another major difference is that your personal credit is connected to you by your Social Security Number. Your business credit history is linked to you by your Employer Identification Number (EIN) or Tax ID Number, which is how the government recognizes your business for tax purposes.
How to establish business credit
Whether you already have an established business, or are thinking of starting a small business, it’s important to begin building business credit early on. But more importantly, is knowing how to utilize business credit effeciently and responsibly. For more information on that, you can visit my post on [insert post title and link here]
Now, in order to get you on the right track, lets tske a look at 5 steps you should take in order to etablish your business credit properly.
1. Choose the right business structure
A good place to start is by choosing the right business structure.
Businesses can be structured as a sole proprietorship (one owner), partnership (two or more owners), corporation (shareholders) or limited liability company (LLC). Each structure has its advantages and disadvantages; it’s important that you choose one that’s right for your business as set up now, as well as for future growth.
If you use a sole proprietorship or partnership, then it may be possible to have only one person report the business income on their personal tax return if they are also responsible for managing bank accounts and paying bills on behalf of their company.
However, making your business a distinct legal entity (which is what you’ll need to do to establish credit for your business, separate from your personal credit) requires selecting a business structure such as an LLC, LLP or corporation. Remember, sole proprietorships do not create a separate business entity.
Conclusion: File your business as an LLC, LLP, or Corporation.
For additional support on choosing the right structure for your company, visit the Small Business Administration. They have a great guide on the subject that you can visit directly by clicking HERE..
2. File for a Federal Tax ID Number (EIN)
An EIN (sometimes called a FEIN or a TIN) is a nine-digit number assigned to your company for you to use when filing your company tax returns, opening a business bank account, applying for licenses and permits, and applying for business credit. Think of it like a social security number for your business.
This is something you’ll need to have, especially if you plan on building business credit.
You can apply for a federal tax ID for free using the IRS assistance tool by clicking HERE
3. Open up a Business Bank Account
Once you have your federal tax ID (EIN) number, you should open up a business bank account. This is a mandatory step in creating a clear separation between your business and personal expenses, which is a very important rule in business finance.
Your banking relationships play an important role in your company’s funding potential. Not only does your business bank account serve as a bank reference on credit applications, it also provides key data that lenders use during a funding review.
4. Establish accounts with Vendors/Suppliers Who Report
One of the first and easiest ways to start building business credit is to apply for accounts with vendors and suppliers that offer Net Terms.
What this means is these vendors/suppliers allow you to purchase supplies, inventory, or other materials on credit, usually allowing 30 days (Net-30) for you to pay your invoice. Then, these purchases and payments get reported to business credit reporting agencies.
When choosing Net-30 accounts to sign up for, it’s important to remember to select vendors that report to a business credit reporting agency. This activity creates your company’s credit profile and business credit report. After your company has several trade lines reporting, a business credit rating (score) is generated.
Another benefit is that these accounts also serve as trade references that can be used on future credit applications.
Some of my top picks for vendors offering Net-30 terms to get you started are:
- Uline – Uline.com offers a wide variety of supplies for your business. Office supplies, shipping supplies, sanitation and cleaning supplies, and if you’re in the food industry, they also have a great catalog of equipment and supplies for that as well.
- Quill – Quill.com is an American office supply retailer, with access to over one million assorted products. It also sells products in other categories such as technology, cleaning & breakroom supplies, furniture, safety products and more.
- Shirtsy – Shirtsy.com is a fun site, offering customizable wearables (such as T-shirts, jackets, shoes, pants etc…) and other products such as mugs, cups, stickers and more. A great site to get as Net-30 accounts with to help your order merchandise with your company logo.
- Grainger –Grainger.com
5. Keep an eye on Your Business Credit Reports
Let us now take a look at the three major business credit reporting agencies: Dun & Bradstreet, Equifax and Experian.
Experian is a multinational data analytics and consumer credit reporting company. Experian collects and aggregates information on over 1 billion people and businesses including 235 million individual U.S. consumers and more than 25 million U.S. businesses.
The Dun & Bradstreet Corporation is an American company that provides commercial data, analytics, and insights for businesses. the company offers a wide range of products and services for risk and financial analysis, operations and supply, and sales and marketing professionals, as well as research and insights on global business issues.
Equifax Inc. is an American multinational consumer credit reporting agency headquartered in Atlanta, Georgia and is one of the three largest consumer credit reporting agencies, along with Experian and TransUnion (together known as the “Big Three”). Equifax collects and aggregates information on over 800 million individual consumers and more than 88 million businesses worldwide.
Each of these three agencies collects data from various sources and may have different information about your company.
When building your business credit, it’s important to periodically check your company credit files. Each of the business credit agencies listed above, provide a way for you to update basic information about your business, and if you uncover any outdated or incorrect information, you can contact these agencies to make the appropriate changes.
Once you’ve established a business credit profile, you may get higher credit approvals, better interest rates and repayment terms on loans and lines of credit.
Conclusion: Follow these 5-steps and you’ll be miles ahead when it comes to establishing and building your business credit.
Should I get a business credit card?
Many of today’s best business credit cards can help ease the pain of managing expenses thanks to built-in tracking tools, accounting software integrations and spend controls. Alternatively, it is never a bad idea to have additional spending power outside of your business bank account. As long as your able to responsibly use business credit to your advantage, and keep your balances low, I absolutely recommend getting a business credit card.
However, not all of us entrepreneurs are able to acquire business funding straight away. If you’re one of these people, I recommend you get a Divvy Card. It’s a great corporate card for your small business, and if you haven’t had luck in acquiring tradition business credit cards, it is a great way to build credit!
What is the Divvy card?
The Divvy Business Card is a smart corporate credit card that pairs with financial software to fully automate the expense-management process for small- and medium-sized companies.
With the Divvy card, you can create recurring or one-time spending budgets organized by event, team, location, project and vendor. You can also set individual spending limits for every cardholder within each budget category (and adjust them as needed on the go). Plus, you can approve department and employee requests for reimbursement of out-of-pocket expenses and mileage.
Unlike some corporate and small business credit cards that charge for each additional cardholder, Divvy provides free physical and virtual cards for all employees. The entire Divvy platform, in fact, is free — the fintech company makes money by taking a cut of interchange fees paid by merchants to cover the cost of processing a Divvy card transaction.
What Credit Score is Needed to Qualify for the Divvy Smart Credit Card for Business?
Divvy doesn’t require a personal guarantee, so there’s no minimum credit score necessary. Divvy also offers a Credit Builder program for new businesses that don’t have an established credit history.
Divvy card benefits
The no-annual-fee Divvy Business Card offers a variety of features to help companies confront many of the more burdensome aspects of financial management, such as monitoring a business’s cash flow and working capital needs, tracking employee expenditures (without relying on cumbersome spreadsheets or sorting through stacks of paper receipts) and preventing overspending.
Here’s what you need to know about some of the Divvy card’s biggest benefits:
Earn rewards for everyday expenses
Like most business credit cards, the Divvy card earns rewards for everyday spending. But unlike most business cards, the rates are determined by your payoff schedule. The more often you pay off your Divvy card balance — such as weekly, semimonthly or monthly — the more rewards you can earn. Here’s what that looks like:
| Category | Weekly payments | Semimonthly payments | Monthly payments |
|---|---|---|---|
| Restaurants | 7X | 4X | 2X |
| Hotels | 5X | 3X | 2X |
| Recurring software subscriptions | 2X | 1.75X | 1.5X |
| Everything else | 1.5X | 1X | 1X |
Rewards earned with the Divvy card can be used for statement credits, cash back, gift cards or travel booked directly with Divvy. And thanks to a handy little rewards-estimating tool on Divvy’s website, you can easily see the potential value of your points for each redemption method. Travel seems to be the most lucrative redemption option, with a value of 1 cent per point. Meanwhile, points are worth 0.5 cents each for statement credits, gift cards and cash back.
While you have to select a billing cycle at the time of your Divvy card application, you can change it later. This could potentially allow you to maximize your rewards earnings based on seasonal business slumps or particularly busy travel periods.
Reduce fraud and overspending
In addition to free physical cards, Divvy also offers virtual credit cards for customers. Each virtual card has a unique 16-digit number, which allows you to monitor and track individual cards. You’ll be able to customize monthly spending limits and where the card can be used, along with how long the card stays active. Using a virtual card is recommended when shopping online, when making one-time purchases or managing subscriptions (such as those for software and licenses).
Save time and money
The Divvy card functions more like a charge card than a traditional credit card, meaning you won’t be able to carry a balance on it. You’re required to pay your bill in full, whether you choose a weekly, semimonthly or monthly billing schedule. Although interest charges on a business credit card are tax-deductible, using the Divvy card means you won’t have to pay interest in the first place.
Build business credit
Similar to a high personal credit score, a good business credit score can make it easier to obtain financing with favorable rates and terms. It can also help you negotiate better trade deals with vendors and make your business more attractive to potential investors, if that’s something you’re interested in.
Divvy reports your card balances and payments to the Small Business Financial Exchange (SBFE), a nonprofit trade association in the U.S. that gathers small business payment data and makes the information available to four commercial credit reporting bureaus: Dun & Bradstreet, Equifax, Experian and LexisNexis Risk Solutions. Additionally, as of April 2021, Divvy also reports payment behavior to Dun & Bradstreet directly.
By making all of your Divvy card payments on time and in full, you can build a positive credit history for your business to better position it for long-term success, opening the doors to acquiring more funding in the future.
Access to special offers
In addition to ongoing spending rewards, Divvy’s corporate partnerships provide Divvy cardholders with access to a ton of rotating promotional offers. These offers may include dollar or percentage discounts at places like Google Ads, Adobe Creative Cloud, Vistaprint, Carta, BambooHR, Verizon Wireless, Amazon Web Services, FedEx Office and more.
How does the Divvy card compare to other business cards?
Most business credit cards, albeit to varying degrees, offer similar benefits: Access to fast financing in a pinch, reporting tools for easier bookkeeping, purchase rewards, separation of business and personal expenses, a way to build business credit, more control over employee spending and more.
However, the combined features of the Divvy card and the financial software that preceded it create a holistic expense management platform that helps Divvy stand out from the pack. With the Divvy card, you’ll get:
- No annual fee. The Divvy card has no annual fee, whereas many other business and corporate cards do, particularly if they’re travel cards.
- No fees for employee cards. Additional cardholder fees can add up quickly, but the Divvy card provides unlimited physical and virtual cards to all employees for free.
- No personal guarantee. With many business cards, the risk associated with late payments or unpaid balances falls on the individual cardholder. The Divvy card, however, doesn’t require a personal guarantee from the business owner, nor does it conduct a hard credit inquiry.
- Customizable rewards structure. Most business and corporate cards offer rewards on spending, but the Divvy card is unique in that its rewards structure is tied to the payoff cycle selected at the time of your application. This effectively lets you choose your own earning rates.
- Budgeting features. Divvy’s software includes robust budgeting tools. You can create budgets by department, team or project, or assign permissions that let managers approve or deny funding requests instantly via mobile notifications and more.
- Integrated bill pay. Divvy’s optional Bill Pay service means you can take care of bills and invoices within the same software, creating a one-stop shop for accounts payable while still giving you control over when approved payments are actually funded.
Should you get the Divvy card?
Whether or not you should sign up for the Divvy card depends on how much value you’re planning on getting out of the card. Many other business credit cards provide valuable sign-up bonuses, annual statement credits worth hundreds of dollars and premium perks you won’t find on the Divvy card. That’s because Divvy started out as free financial software for businesses, and the Divvy card came later.
As a stand-alone business credit card, it’s fine. But if all you’re looking for is a dedicated business credit card, you can probably find more lucrative rewards and benefits elsewhere. However,
However, if you’re looking for a more comprehensive way to manage your company’s finances, the Divvy card is worth considering. When you evaluate the Divvy card as part of a holistic platform that enables businesses to control company spend, create and manage budgets, access capital, automate the expense reporting process and more, it becomes a lot easier to see its value.
How to maximize the Divvy card
- Choose the weekly payoff plan. If you’re able to pay off your balance on a weekly basis, you’ll earn 7X points on restaurants, 5X points on hotels, 2X points on recurring software subscriptions and 1.5X points on everything else.
- Redeem points for travel. The most valuable way to redeem your points is for travel through Divvy since you’ll get a value of 1 cent per point.
- Take advantage of virtual cards. There’s no limit to how many virtual cards you can get. Plus, they’re free and you can customize and manage them remotely. You can set up a card for each vendor, set spending limits, monitor transactions in real time and more. Although virtual card benefits are growing in popularity, it’s not something every business card has.
- Use Divvy’s financial management software. The main reason to get the Divvy card is if you already use Divvy’s financial software or you’re looking to streamline your business’s spend and expense management.
The bottom line
For business owners interested in building business credit, and more efficiently monitoring company spending, the Divvy Business Card is a great choice since the card is paired with financial software to fully automate the expense management process. You’ll also have access to a variety of other great benefits, including rewards on spending, free company cards and no annual fee.
Sign up for Divvy today!
Sign up now using the link above and if approved, receive a $100 visa gift card.
The Private Chef 