Equifax Small Business Credit Basics
Establishing Equifax Small business credit starts with creating an Equifax Small Business profile on their site. If you’re already doing business with trade partners who report to Equifax Small Business, you already have an established business credit profile. Once your business has been included in their database, you are building business credit.
- Make sure your business is a separate legal entity. We recommend forming a limited liability company (LLC).
- Contact the Internal Revenue Service (IRS) for an Employer Identification Number (EIN). You need this to open a business bank account.
- Open a business bank account in the exact legal name of your business. Make sure it matches the name on your LLC filing.
- Set up a business phone number with a 411 directory listing. This shows lenders that you are a legitimate business.
- Set-up net-30 accounts with vendors that report to Equifax Small Business.
- Check your business profile regularly to ensure proper reporting and that all information is correct.
Equifax Small Business uses a three score rating system to help investors and lenders when deciding to extend credit to a business. Each rating system has different numeric ranges to score a business’s creditworthiness. The three scores and their respective ranges are:
- Payment Index Score (0-100)
- Business Credit Risk Score (101-992)
- Business Failure Score (1000-1880)
The Payment Index Score measures a business’s payment history over the past year. The key driver is “days past due” in this metric. The Business Credit Risk Score measures the probability a business will default in paying its obligations for ninety days or longer. The Business Failure Score measures the chance a business will fail within the next twelve months — with each score, the higher, the better (i.e., less risk for the lender).
Establishing Credit for Your Business
Like personal credit, business credit lines are also reported to business credit reporting agencies, including Equifax Small Business. Here’s how you can establish and grow credit for your business.
Step 1: Obtain an EIN Number for your business
EIN stands for Employer Identification Number. The EIN is a number assigned to your business by the IRS for tax identification purposes. Your bank and partner vendors may also require this information before choosing to do business with your company.
Caution: Some less than credible websites may lead you to believe there is a fee associated with obtaining an EIN. This is false and predatory, as the IRS does not charge for establishing an EIN.
Step 2: Open a business banking account
Every new business needs a business bank account. There are numerous benefits to opening up a business bank account:
- Maintain the corporate veil by keeping personal and business accounts separate.
- Make bookkeeping simple.
- Open a merchant account to accept credit card payments. You probably want to get a point-of-sale (POS) system, too.
- Business banking is a prerequisite if you decide later to set up an LLC, take on a partner, or sell your business.
Using a business bank account is practically a necessity. A major stumbling block of using a personal bank account for your business is that you will not be contributing to your Equifax Small Business credit scores. The credit information will be included in your personal credit report, not your business credit report.
Step 3: Establish lines of credit with large starter vendors
There are several ways to build your Equifax Small Business credit, and one of the fastest and easiest ways is to establish lines of vendor credit with large corporations. Some examples of companies that can help you establish vendor credit include:
- Uline.com (shipping supplies and office equipment)
- Quill.com (office, cleaning, and packaging supplies)
- Grainger.com (industrial supplies like hardware, power tools, etc.)
Vendor partners have reporting requirements that must be fulfilled before they send transaction information to Equifax Small Business. Net-30 vendors may require a minimum order amount before reporting to the business credit bureaus, or require prepayment for new businesses looking to establish business credit.
Important: Choose vendors who report business transaction data to Equifax Small Business to begin actively building your Equifax Small Business credit scores. If vendors do not report tradelines on your Equifax Small Business, it won’t help build your business credit.
Step 4: Make payments on time
This simple crucial step is often forgotten in the excitement of running a business by novice business owners. Making payments on time (or early) is a leading metric used by creditors to evaluate the risk associated with extending credit to businesses. One key is to keep careful financial records, so you don’t accidentally miss payments.
Recommended: Always pay at least the minimum balance to your business creditors every month to continue building good credit.
Step 5: Monitor your business credit report
Stay informed on your business credit status by requesting a report from Equifax Small Business. You can use this report to make sure your business information is correct and up to date.
Equifax Small Business also offers several paid services that can help you protect and grow your business. You can choose from services that give you access to your business credit report and services to help protect and monitor your business credit.
Business Credit Best Practices
Most business managers agree on the following best practices for growing or improving business credit ratings:
- Set up lines of credit with more than one vendor: This will allow you to show multiple trade lines reporting on your Experian Business credit report. This can help your business credit score to rise faster.
- Make payments early: As discussed previously, this will have a considerable impact on your credit score reporting.
- Make payments using just your business bank account: This will ensure the transactions are reported to Experian Business and the other business credit bureaus, so they are not included on your personal credit report.
- Prioritize record-keeping: This is necessary for tax purposes and the overall financial success of your business.
Common Credit Missteps and How to Avoid Them
New business owners find themselves making simple mistakes that can cost them dearly when trying to build good business credit. Some important examples to be aware of include:
- Do not apply for multiple business credit cards at the same time. Banks and other lenders see these credit card applications as a sign that your business is in financial trouble and needs multiple streams of capital.
- Do not use business credit to purchase personal items. This practice ensures you maintain the corporate veil, so your personal assets stay protected. Moreover, it keeps the financial paperwork cleaner and easier to manage when tax time comes.
- Do not overextend your credit by using lines of credit to pay other creditors. This can cause a domino effect of financial obfuscation, high-interest rate payments, and ballooning debt. Ideally, you only want to extend your business credit to about 30% of your credit lines.
- Do not allow employees unrestricted access to business credit lines. You run the risk that even the most seemingly loyal employee begins treating this business credit line as free money. Most banks offer ways to set employee spending limits on your business accounts and receive notifications when transactions occur.
IMPORTANT: Pay off all creditors each month. This ensures you keep building good business credit.