How do I build my LLC credit?How to Establish and Build Your LLC Credit Report
If growing a business was easy, everyone would do it. There are a lot of moving parts and things to take into consideration.
One of those things is your LLC credit, or the credit score of your LLC, to be precise.
Credit can make or break a business. It’s like a safety net for your cash flow, a tool you can use to grow exponentially faster – but how do you get started?
When banks are looking at your business’ credit history to decide whether or not to give you credit, you’ve got to start somewhere.
Here’s some important information about building LLC credit from scratch and how to establish your business as a credit-worthy entity that lenders are eager to work with.
What is LLC Credit?
An LLC, short for limited liability company, is a structure for a business that offers the owner a level of protection against liabilities.
An LLC acts to give the owner some protections against liability like a corporation would have, but without the need for a full corporate structure like you’d find in a large corporation.
An LLC can be established by a partnership or even by a sole-proprietor.
For many smaller businesses, it wouldn’t be viable or economical for a sole proprietor to establish a full corporation, so an LLC offers a great alternative with some of the benefits without all of the requirements.
Since there’s a degree of separation with an LLC compared to a regular sole proprietorship or small partnership, the business will have its own credit score independent of the owner’s.
There are a handful of ways that a business owner can take advantage of this as opposed to having their business rely on their own personal credit score.
8 Steps to Build LLC Credit
1. Incorporate or Form an LLC
This is the first step. This creates a separate entity for the business to distinguish itself from your own personal credit score and history.
This signifies that the business is its own entity, even if your personal credit may play a role early on in getting your business credit established.
Forming an LLC is a practical step for a new business or a business that’s looking to formalize things and grow to the next level.
2. Get Dedicated Business Phone Line
Have a dedicated phone number for your business and list it under the legal, registered name of the business.
You can use this number when opening a bank account for the business and filing other business documents, and it helps to establish the business as an independent entity and to keep it separate from your personal phone number.
3. Register For a D-U-N-S Number
You can register for a D-U-N-S number for free from Dun & Bradstreet.
The nine digit number is used to establish your business as a unique entity.
While you may be wary of being in a database as an individual for privacy concerns, getting your business information in a database like this can be beneficial in regards to establishing the business and in turn establishing credit for your LLC.
The D-U-N-S number is a datapoint that’s used all around the world to establish and identify businesses and their unique information.
It starts with things like your business location and phone number, but also identifies things like corporate information, relationships to the business, and data points that indicate the financial health of the company.
Your D-U-N-S number can be used to pull a business credit report which helps lenders to verify that your business is in good standing and safe to lend money to.
This is something that you want to put in place as you work towards building your business’ LLC credit.
It’s one more indication and one more entity keeping track of things (And in this case, that’s what you’re aiming for, to have the credit bureaus and agencies “vouching” for you, essentially).
4. Get a Federal Employer Identification Number
You can get an employer identification number from the IRS.
It’s free to register for an EIN, and it’s one more way to identify your business as a unique entity which is helpful in regards to LLC credit.
Your business’ EIN is similar to how a social security number works for individuals.
It’s a uniquely identifying string of numbers that is associated with your business and establishes it as a unique entity, and can come in useful when building credit for the company.
5. Open a Bank Account In The Business’ Name
Once you’ve started an LLC, you should open a bank account in the name of the LLC.
If you’ve used your own name on the business bank account before (for example if you had a sole proprietorship), opening a business bank account in your company’s name will help to keep your business and personal finances separate and to start building up a banking history for your company.
6. Open a Business Credit Card
A business credit card is essential for ordering things online for the business and it also helps to give your business some credit history.
The interest rates on credit cards are high, and they’re probably higher than your margins, so don’t let them eat into your profits.
A credit card is a useful tool, but carrying a balance to invest in your business is like trying to climb a steep hill that’s covered in ice with the wind blowing against you and no grip on your shoes.
Make sure you’re using it wisely and paying it off early! Don’t let the interest stack up or it won’t just be an unnecessary expense, but a foolish one.
If you need to borrow money for your business, a credit card isn’t the way to do it. Which brings us to our next step…
7. Open a Line of Credit
A business line of credit will give you a much more favorable rate than a business credit card and is a better way to purchase things for your business.
The nice part is that you can find lines of credit that are tied to a credit card, so you can still place orders and spend with the convenience of a credit card, but with a much lower interest rate like you would expect from a line of credit.
The goal here is to use credit widely. You might not be able to open a huge line of credit for a brand new business, or at least, it will take your personal credit history into account, so keep this in mind and try to plan ahead as much as you can.
8. Use Your Credit The Right Way
Different types of loans for a business should be used in different ways.
You would use a mortgage to cover the cost of commercial real estate if you’re purchasing a location, you would use a business credit card for smaller monthly recurring expenses like a cellphone bill or web hosting, and you would use a lower-interest business line of credit for purchases like a new laptop.
You would use an auto loan to get a vehicle, and so on and so forth.
The sooner you stop using credit products that are in your personal name and you start using ones that are in the business name (even if it’s just a small secured credit card to start), the sooner you’ll open the doors to better rates and being more trusted by other businesses.
Benefits of Building Business LLC Credit
Advantageous Terms With Suppliers
If your business purchases things from suppliers, having a higher business credit score can help you to achieve better terms on those orders.
It could mean getting a better interest rate from a lender, better terms from vendors, extended contracts, and possibly even better prices if they know your business is stable and they want to build a long-term relationship.
Advantageous payment terms, a slightly better interest rate, or better prices on supplies and inputs overall can have a major role in how quickly a business is able to grow so these things are worth pursuing.
Separating Personal Finances From The Business
As an entrepreneur, it’s normal to feel very close to your business.
If you’ve worked hard to establish strong personal credit, it can almost feel like “starting over” to establish a separate credit score for a business, but it’s still worth doing.
This separation opens many doors, including all of the benefits of establishing business credit that we’ll list in this section.
Aside from favorable rates and less personal liability, a huge reason to separate things is that business loans (even business credit cards or lines of credit) can have much better interest rates and terms. Since these loans are used to generate profit, banks are often willing to lend money at a lower rate.
Separating your personal and business finances also opens the door to sell the business down the road, to bring in investors, and other opportunities for growth.
This becomes much more complicated if the business is too closely tied to one individual.
Having your business finances separate can help to protect your personal finances in the event that the business fails or runs into trouble, with certain limitations, of course.
The traits of a business that factor into a strong credit score line up with the types of things that are just a good standard practice for a business to have in order to achieve long-term growth and success.
As such, when you take steps to establish good LLC credit, you’re doing things that are good for the business, such as keeping up to date on payments, finding better rates, and being wise with finances.
This doesn’t mean you should avoid taking risks when there are opportunities for growth, but it’s about doing it in a wise and diligent way.
Avoid Having to Make Prepayments
Some suppliers will require you to prepay for orders from them, and this is much more likely if your LLC is brand new or lacks any credit history.
Establishing this credit history can enable your company to pay on delivery, which can be hugely beneficial to the overall cash flow, and can also help to avoid sketchy situations where you might get stiffed by a supplier after paying them, which can be devastating to any company, but especially for a new one.
Supercharge Your Growth
Once you’ve gotten to a point where you can consistently use your business to turn $1 into more than one $1, to oversimplify things, you’ll want to start putting more and more cash into the business to continue repeating the process.
Access to capital can make or break your business, especially if you are having issues with cash flow.
For instance, you may have 100 orders but only enough cash to fulfill 50 of them off the bat.
More access to cash means you can fill more of those orders, earn more profits, and then have greater cash flow for the next round of orders.
But if your growth is limited by a lack of capital, things can get squirrely very quick.
A better LLC credit score means you’ll have more access to money, more potential for growth, and better rates while you’re at it.
It’s Time To Build Your LLC Credit
We’ve gone over many steps you can take to establish, build, and improve your LLC credit.
Follow the steps at the top of this page to get the ball rolling, and then it’s just a matter of time and discipline.
Use the initial financial products that you’re able to access (like a small business credit card), and over time you’ll have more and more doors opening up.
All of the steps on this page will help you build your LLC credit so that your business can stand on its own legs, and become supercharged for growth with nothing to slow you down.