The ‘Secret’ Path To Startup Business Credit

Secret Path to Business Credit

Industry insiders know that very young companies have to take specific steps in a particular sequence over a period of time in order to build their business credit. I didn’t know that! But I’ve stumbled onto a bunch of blogs and web sites that all say very similar things. I’ve organized this important information below.

First I’ll provide an overview in the form of a checklist. Background and details on the steps follow.

Warning: this whole process of establishing business credit requires patience, which is not something entrepreneurs like me tend to be very good at! And that patience will need to start with reading this very long blog post…

The Startup Business Credit Checklist

  1. Prove you aren’t a fraud (this is a BIG problem for credit providers)
    • Incorporate
    • Get a free EIN from the IRS
    • Open a business bank account separate from your personal account
  2. Show you are a serious business that will be around
    • Get a unique commercial business address
    • Get a business phone number and a toll-free number
    • Build a business web site
    • Keep your business bank balance well above zero at all times
    • Start recording your business transactions in an accounting system
  3. Show up digitally
    • Check for your online listings
    • Make sure they are all consistent
    • Apply for a free D-U-N-S number
    • If you haven’t already, get your free personal credit report
  4. Apply for and use credit from “startup friendly” vendors
    • See below for the “secret list
    • Secret #2: DON’T put your social security number on the application, leave that blank and just put in your EIN
    • Make “significant” monthly purchases on credit and pay the balance off early
  5. Check your business credit reports
    • Make sure you have the “secret” minimum number of required transactions to get more credit
    • Learn what does and does not go onto your business credit report
  6. Apply for selected store credit after you have at least the secret minimum credit history from your initial startup friendly vendors
    • Suggested vendors below
    • Use the credit for purchases and pay the required minimums early
  7. Apply for more general purpose business credit cards
    • Avoid “fake” credit cards that require your social security number
    • Use the credit for purchases and pay the required minimums early
  8. Start talking to your bank about loans
    • Meet well before you need a loan
    • Be prepared

Background on Business Credit

Why are all of these steps necessary in this order? And why should you bother?

First of all, establishing a good business credit history can lead to financing being available at attractive terms to your business in the future. If you are successful and need to grow, chances are you will need some extra cash to grow as fast as your business is able. Alternatively, the economy can slow down, big customers can suddenly go away, competitors can start to eat into your revenue. This can also create a need for short term debt financing. Building a good business credit history is a foundation for future success just as much as good product or service, a good brand, and happy customers.

Second, you should separate your business credit from your personal credit. Many entrepreneurs get frustrated that they personally have to guarantee loans, lines of credit, business credit cards, and other forms of business debt. Some day, you will want to be able to get out from under those personal guarantees. You need to start years ahead of time in order to free yourself. It’s frustrating, but trust in your business takes a long time to establish, because of the consistently high failure rate of young businesses.

Third, your business credit history may be used for things other than getting business credit. For example, you need a D-U-N-S number from Dun and Bradstreet to get US federal government contracts. Some business grants require it as well. Angels or big corporate customers may check out your business credit history.

That’s why you need to pay attention to your business credit!

So why is it so hard for young companies to do this right?

First, fraud is a problem. The bad guys try to get business loans because “that’s where the money is.” So the providers of business debt financing check out applicants closely.

Second, credit is risky. Businesses can suddenly go bankrupt. Or they can close operations, move and set up in a new location with a new name. They can be slow to pay when cash gets tight. Of course, you aren’t one of those companies, right? But credit suppliers are from Missouri – the “show me” state. They need to be shown that you can be trusted. And, not all credit suppliers have the same attitude towards risk, so they want others to take a risk with you first, and see how you do paying it back, before they are ready to do the same.

Which leads to the third issue, regulation, particularly bank regulation. One consequence of the “Great Recession” was a significant tightening of those bank regulations. The federal government is trying to avoid another bank bailout. An unintended consequence of that tightening: banks had to look very, very closely at all of their lines of business and most realized that they were losing money on small business lending. So the big banks have pulled back, big time, from lending to companies like you.

On the flipside, the federal government cares a lot about consumer credit protection but not a whole lot about protecting businesses from the credit industry. That means business credit agencies have a lot more power to do what they want, without worrying about regulator blowback.

Here’s another “secret” detail: there are three different companies that keep track of business credit, each with a slightly different approach and impact. Ideally you need to keep them all “happy” to keep all of your business credit options open.

  • Dun and Bradstreet is focused on trade credit, which it has been collecting data on and reporting for more than a century
  • Experian is a global 800 pound gorilla, with 32 credit information bureaus around the world, both consumer and business
  • Equifax is the oldest consumer credit bureau and a relative newcomer to business credit, but its bank customers are important to small businesses trying to get bank loans. Yes, this is the company that’s been in the news about the data breach.

If you are familiar with personal credit reporting, you’ll see that Transunion is not on this list. That company does not do business credit reporting, just as Dun and Bradstreet does not do consumer credit reporting. Experian and Equifax serve both business credit and consumer credit markets.

Here is one more painful “secret” part of the process: only about 6,000 businesses report to one or more of these three companies on the credit they give to businesses. So even though you may have business credit it might be “invisible” to these three credit bureaus!

Yikes! Is it any wonder it’s so hard for small young businesses to navigate this process? But if you follow the checklist you should be way ahead of your peers in building trust that turns into credit for your business.

Details for The Startup Business Credit Checklist

1. Prove you aren’t a fraud

As mentioned above, loan application fraud is a big problem. There are a few steps you can take to start the process of building trust with credit suppliers.

a. Incorporate

There are plenty of resources to help you figure out where and how to incorporate (SCORE, Entrepreneur, and fee-for-service sites Legalzoom, Incorporate.com, among others). The biggest decision is the “type of entity” to choose. Your accountant will tell you one thing, your lawyer may tell you another. Most entrepreneurs I know chose to form an LLC, or Limited Liability Corporation. The exception would be if you are sure you will be raising venture capital very soon, in which case a Delaware based C corporation makes sense. Here is an SBA discussion of the topic.

b. Get a free EIN from the IRS

The Employer Identification Number, or EIN, is provided to US businesses by the IRS, or Internal Revenue Service. It is used to track all things about businesses, but the IRS really really cares a lot about collecting employer taxes that you owe for any employees on your payroll.

There is no need to pay any money for this. Here is the IRS site to get your FREE EIN.

c. Open a business bank account separate from your personal account

Once you are recognized by your state through incorporation, and by the federal government through your EIN, it’s time to set up a business bank account. Your selection of banks may be confusing, but we’ve seen that community banks and credit unions tend to give better service to companies just starting out.

2. Show you are a serious business that will be around

New businesses fail at a pretty consistent rate. That’s one of the reasons some banks and other credit providers won’t even look at you if you aren’t in business for at least three years. They want long term customers.

Here are some steps to take to show that you “mean business.”

a. Get a unique commercial business address

I operate out of my house, but after learning that this is important to creditors I’m considering other options. I’ve also learned that the D-U-N-S number (see below) is tied to a very specific address that has to be different from every other business listed in the Dun and Bradstreet database. See what other options there are in your area if you are working from home.

If your reaction is, “but I don’t want to pay the expense!” I understand. There are many tradeoffs between bootstrapping and debt financing. This and a bunch of other steps that cost money will raise your burn rate. But, it may well be worth it in the long run.

b. Get a business phone number and a toll-free number

Here is another expense. Apparently lots of credit suppliers check 411 to see if businesses are listed. Your personal cell phone won’t be listed as a trusted, permanent, not-a-fraud business phone. There are some new options based on the internet that are not too expensive, but they aren’t free!

c. Build a business web site

Pretty much every customer wants to see your web site. So do companies that might lend you money! Again, there are cheap options available, but make sure you look “legit” and reasonably up-to-date.

d. Keep your business bank balance well above zero at all times

At some point companies with money to lend will be looking hard at your bank account. Or rather, their software will! Here is where you need to start demonstrating your ability to manage the business. Money comes in regularly, money goes out regularly, and you don’t overdraw. It’s basic but important.

e. Start recording your business transactions in an accounting system

This is also pretty basic but important. Someday you want to be able to borrow money over a longer term and at lower interest rates than what a credit card offers. The software, or banker, that evaluates your business is going to want to see historical financials as recorded in an accounting systems such as QuickBooks or Xero. The sooner you bite the bullet and get legit with bookkeeping and accounting, the sooner you can access attractive debt.

3. Show up digitally

Your business will have an online footprint. Among other places:

  • The state where you are registered
  • The IRS with your EIN
  • The domain registrar for your web site
  • Google
  • Your phone number in 411
a. Check for your online listings

Just because you think you should be visible online doesn’t mean you are! Digital mistakes happen.

b. Make sure they are all consistent

It is very easy to have slight name changes screw things up for you with potential creditors. Address changes happen frequently too. These need to be fixed ahead of applying for credit!

I have this issue big time. My official company name is Gooding Growth LLC. But, this web site is Four Colors of Money for Entrepreneurs. I registered at one house but I’m now living in another house. It’s pretty messed up!

There are lots of sites and blogs focused on this issue – here’s one I liked.

c. Apply for a free D-U-N-S number

Now that you are looking legit, you understand the importance of addresses and consistent business names, you can get yet another ID number. Dun and Bradstreet has tens of millions of business locations identified by number. All creditors will be interested in seeing you here – this shows you are really legit! – and your big vendors may also check up on you here.

First see if you are in there already on their home page. If not go to https://www.dandb.com/free-duns-number/ and you can get a free DUNS number within 30 days.

d. If you haven’t already, get your free personal credit report

Forewarned is forearmed. While the goal is to get business credit that is unrelated to your personal credit, in the short term you may need to leverage your individual credit reputation. Start by getting your annual free credit report – it’s free annually because of a federal law that makes it so. And this is the only place to get it free as required by law: https://www.annualcreditreport.com/

4. Apply for and use credit from “startup friendly” vendors

Now, finally(!) we are getting somewhere. It takes a while to lay the groundwork, especially if you haven’t done it already and “just started” your business. Like many people do! As for me, I’ve done just 6 of the 12 items listed so far. I have work to do myself.

a. The Secret List of “Startup Friendly” Vendors

There are some – maybe a handful, maybe more – companies that sell stuff to small businesses that are willing to give limited credit to really young businesses that have no credit history. And, importantly, these companies are among the 6,000 that report to one or more of the three business credit bureaus. You need credit, and credit reporting, to build a business credit history.

What I read is that you can expect as low as a $500 line of credit and 7-30 day terms. But this is a start! Build trust here and others will follow later.

These companies are listed in sources of “net 30 day vendors” but we have not independently verified that they are correct. And, things change. Reliable has been acquired by Office Depot and we guess that has changed their status as a net 30 day vendor, which is why they are not listed below.

b. Secret #2: DON’T put your social security number on the application, leave that blank and just put in your EIN

This is one of the critical steps in the process to ensure that you get credit tied to your business credit history, and not your personal credit history.

  • You do not legally need to fill out your social security number on any business credit application
  • You should not put in a “fake” social security number, as that IS illegal
  • If this or any other credit application won’t save unless you put in your social security number, then you know it is “fake” business credit. It is actually tied to you personally and will show up on your personal credit history!
c. Make “significant” monthly purchases on credit and pay the balance off early

Yep, it’s time to spend more money. It’s not entirely clear how much you need to spend on credit in order to get a report in one of the three credit bureaus, but $100 to $150 seems to be the minimum. And these companies, plus future potential credit suppliers, want to see that you are buying regularly and paying back regularly.

So you don’t want to just buy stuff for the sake of building credit. It will get expensive before you can advance to the next stage.

And make sure you are prepared to send in a check or otherwise pay very soon after the purchase! Start with “fake” credit you don’t really need, so you can build trust for the future.

5. Check your business credit reports

Now it’s time to verify that the process is working.

  • Dun and Bradstreet lets you search for your business from their home page.
  • Experian will let you look here is where you can see their report, if any, on your business – and also here.
  • With Equifax you can check here for info on your business.
a. Make sure you have the “secret” minimum number of required transactions to get more credit

I’ve seen a variety of reports suggesting that somewhere around 10 transactions, perhaps across as many as five different vendors, may be needed to built trust for the next set of credit suppliers. I’ve also seen suggestions that ten $100 purchases paid back might be less helpful than five $2,000 purchases bought on net 30 days and paid off ahead of schedule.

It’s best not to be too anxious about gaming the system. Even if that’s really hard for you as an impatient entrepreneur

b. Learn what does and does not go onto your business credit report

Take a minute to think about what vendors may be supplying you credit that aren’t on the report. That list is pretty large – somewhere between 45,000 and 500,000 businesses extend trade credit and don’t report to the credit bureaus.

If building a strong credit history is really important, and there are non-reporting vendors who would make strong trade references for you, consider paying for the D&B CreditBuilder service that allows you to add trade references. It’s not free and not guaranteed, but it may make sense in this circumstance.

6. Apply for selected store credit after you have at least the secret minimum credit history from your initial startup friendly vendors

You are on your way! Now the list of potential credit suppliers is a bit larger.

a. Suggested vendors
  • BP, Exxon, Shell, Sunoco may all extend significant credit at this point to your business, without using your personal credit history. This can be very helpful for gasoline and sometimes other vehicle related expenses
  • Office Depot can expand your office supply options
  • Costco, Sears and Tractor Supply are cited by some as also willing to offer some credit once the initial credit history is built
b. Use the credit for purchases and pay the required minimums early

Don’t go wild with purchases, and make sure you can at least pay the minimum balances just a little bit ahead of schedule. Again, you are building a credit history that will ultimately support major loans at attractive terms.

7. Apply for more general purpose business credit cards

Give the last step some time to show you are a responsible business before you start applying for business Visa or Mastercard credit cards that can be used anywhere.

a. Avoid “fake” business credit cards that require your social security number

All along this process you’ve been trying to avoid mixing personal and business credit. Although you may have to provide a personal guarantee on the credit card, you can avoid having the transactions reported to consumer credit bureaus. But you have to be careful. According to this blog by Fundera:

Discover and Capital One report business card usage to personal credit bureaus, and Chase and U.S. Bank report seriously delinquent accounts, but credit cards issued by Bank of America, Citibank, BBVA, and Wells Fargo won’t impact your personal credit score.

b. Use the credit for purchases and pay the required minimums early

Same advice as above. You are playing a long game and some patience is required.

8. Start talking to your bank about loans

If you’ve been diligent on the steps above, your chosen local bank should be very happy to speak with you.

a. Meet well before you need a loan

Banks take a long time to get to know young, small businesses. They are heavily regulated so they have to be cautious. But, community banks and credit unions pride themselves on relationships with responsible small businesses.

You’re now ready to build that relationship. You have a steadily improving credit history. You have financial reporting from your accounting system. And you can plan that first meeting at least 90 days before you start the loan process because you have other, more expensive credit at your disposal for short term needs. What you want to talk to the bank about is a low cost loan to fund growth.

b. Be prepared

Think of the banker meeting as an important customer sales call. Be professional. Bring your most recent end-of-month balance sheet, your year-to-date profit and loss statement, and your year-to-date cash flow statement. Be prepared to talk about the numbers, to the extent you can.

Be ready to talk about what you might need a loan for – what is your use of proceeds? You don’t have to have all of the details, but a high level summary will help show your banker you have a plan.

Plus, be ready to ask questions. Do they have an active SBA loan program? What is their line of credit product like?

The End of The Business Credit Path?

There is no end to the process of building business credit! As your business grows, so does its needs for financing. Credit will likely be an important part of the financing mix for the life of your company. That’s why you need to spend some of your time building a positive customer credit history. It’s a worthy investment of time and money to ensure you can get the lowest cost financing on the best terms as possible.

Don Gooding

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