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How to Establish Business Credit for the First Time


Access to business credit can be a lifeline when businesses most need it, providing cash flow for payroll, purchase of goods and services and investment into expansion. For new businesses, establishing credit is even more pertinent for building credibility, accessing finance and the separation of personal and business finances. So, how can companies with limited time in business establish business credit for the first time? 

Step-by-Step Guide to Establish Business Credit for the First Time

Establishing business credit takes time, it won’t be an overnight process, so be prepared to be patient. Here are a few steps to setting up a solid financial foundation for your business from the start.

  • Decide on a legal structure for your business, such as sole proprietorship, partnership, corporation or LLC (US), LLP (Canada). It’s vital to understand the differences and the impact this decision could have on your personal finances too. You should always consult your financial advisor for help in deciding on the right legal structure for your business.
  • Register your business by applying to the IRS for an Employer Identification Number (EIN) in the US or apply to the Canada Revenue Agency (CRA) for a Business Number in Canada. This will give your business a unique identification number for tax purposes and will be necessary for establishing business credit.
  • If you choose a formal business structure such as corporation, LLC or LLP, you will need to complete all the necessary paperwork to incorporate your business and have the information filed with the appropriate agencies. This step is also crucial for the separation of business and personal finances. 
  • Research business bank accounts and open a checking account in the company’s name. You will need to conduct all business transactions through this account. In Canada, depending on your expected revenues, you may need to register for the Harmonized Sales Tax (HST) and/or Goods and Services Tax (GST) number which is essential for sales tax reporting. Typically, businesses generating revenue of over $30,000 in a quarter must register and pay sales tax but seek advice from your accountant on your specific situation. 
  • Register your business with the business credit bureaus. In the US, the main credit reporting agencies are Dun and Bradstreet (D&B), Experian Business and Equifax Business. In Canada, the two main credit agencies are Equifax and Transunion. All of these entities produce business credit scores and reports which lenders and others will use to determine the business’ creditworthiness. Each agency will use their own unique calculation methods and scoring systems to communicate your business credit profile. 
  • Establish trade credit lines with your suppliers by finding those that will allow you to purchase goods and services from them in agreement for payment at a later date. Certain vendors may extend credit to a new business on a small scale at first and as you demonstrate responsibility in making payments on time, you might find they can extend credit further. Timely payments should be recorded on your business credit profile, showing your ability to manage credit and debt in a responsible manner and also results in enhanced credibility with your suppliers. 
  • Networking and nurturing relationships with suppliers in your industry can help you to access more favorable trade credit terms.
  • Ensure your financial records are organized from the start and maintain them. Potential lenders will use income statements, balance sheets and cash flow statements to assess your business’ financial health and determine eligibility for credit. 
  • Monitor your business’ credit score with the credit agencies to check for inaccuracies which can then be dealt with promptly before they have an adverse effect. 

Ways to Build Business Credit through Finance

Applying for and being approved for credit can help to build your business credit profile, assuming that you’re keeping your commitments to making payments. A business credit card can help you in establishing credit and managing expenses in the early days of business but they often come with high interest rates. If cash flow is tight anyway, It’s also easy to fall into the trap of not paying them off in full and having to take on more high interest debt in order to repay them. This can have an unwanted impact on your business’ credit that is hard to reverse. 

As your credit profile strengthens, small business loans are an attractive form of finance that can help build credit further and provide much-needed working capital as you grow a new-start business. Unfortunately for new business owners, small business loans are becoming increasingly hard to come by and main street lenders will often stringently insist on several years’ business history and financial statements plus an above average credit score. In this respect, using loans to build credit rating is a dilemma for many new businesses – they need the loan to become established yet can’t get the loan before being more established. 

What startups often have in their favor is a positive accounts receivable position. A solid order book of consistent revenue-generating clients might be considered collateral for accounts receivable financing or factoring. Alternative lenders can extend credit based on the value of your outstanding invoices. 

To maximize the benefits of positive accounts receivable when seeking credit, it’s important to;

  • Implement highly structured invoicing practices that outline payment terms, due dates and payment options in detail to ensure timely payments.
  • Monitor aging reports regularly to identify overdue accounts and take appropriate action to collect outstanding payments.
  • Consider offering early payment discounts to encourage clients to settle their invoices early.
  • Establish open lines of communication with your clients around payment expectations and address issues swiftly. 

Ultimately, a factoring company will be interested in your potential for growth as a business, as evidenced by outstanding accounts receivable. Utilizing unpaid invoices to generate cash flow can help a new business to get themselves into a position where a bank will consider them. 

While factoring itself doesn’t directly contribute to enhanced credit score, the improved cash flow and credit management associated with it, positively impact a business’ ability to handle other credit sources such as loans and credit cards. Factoring also frees up collateral to be used for other credit, potentially diversifying your credit profile. Since factoring doesn’t involve taking on new debt, it doesn’t directly impact your debt-to-credit ratio; this can be beneficial for your credit utilization, a key factor in determining your credit score. 

The New Business Credit Challenge

Access to credit for new businesses can be challenging but it’s not impossible. Lenders are often cautious when providing credit to new businesses due to lack of credit history and track record. Building business credit as a new business is a gradual process that takes consistent financial responsibility. Make sure that you follow our steps above and are diligent in paying bills on time, managing trade credit accounts and maintaining positive relationships with your suppliers. Over time, efforts will contribute to a healthy business credit profile. 

If you face challenges in accessing finance through poor or lack of established credit, alternative finance options such as invoice factoring can help bridge the gap until you’re in a stronger position. Consider seeking advice from financial advisors who can provide guidance for your particular situation and as always, reach out to the experienced team at Sallyport to explore your finance options. 

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