How to Build Business Credit

Good business credit empowers your small business, giving you access to larger loans and more credit to develop your products, hire new employees, or open a new location. But good credit doesn’t happen overnight. In this article we’ll explain what business credit is, how it differs from a personal credit score, and how your small business can begin building credit now to prepare for future financial needs.  

What is business credit?

Business credit reflects your company’s ability to repay borrowed money to lenders. In many ways, business credit works much like personal credit. Just as a bank would check your personal credit report for a shiny new car, a potential lender will look at your small business’s credit rating before issuing a loan to open a shiny new location.

If business owners don’t keep their credit history in mind, future growth opportunities might be lost.

Business credit bureaus like Dun & Bradstreet, Experian, or Equifax rely on reported payments from creditors and vendors. For every successful repayment reported for loans or trade goods, your credit score with those bureaus goes up.

When you need to open up a new loan or line of credit from the bank, the bank might check your business credit profile to ensure it’s a safe investment. Likewise, a good credit score could convince a potential supplier that your business is reliable enough for a trade credit agreement where you purchase goods but pay for them later.

Why should you build your business credit?

Building business credit comes down to giving creditors the chance to see your responsibility firsthand. By accepting smaller loans and credit amounts first, you create more confidence in your company’s ability to pay its debts. A higher credit score represents that increased confidence with a concrete number.

How do business and personal credit differ?

Despite their similarities, personal credit and business credit work differently in some key ways.

First, the numbers for a business credit score and a personal credit score look quite different. While the lowest personal credit score is a 300, a business credit score tops out at 100. So you can’t compare a personal score and business score side by side.

Second, lenders rely on different formulas for personal credit and business credit. Different formulas from Fair Isaac Corporation (FICO) are used to calculate personal credit from a person’s credit history. The three main credit bureaus don’t actually use these FICO scores—lenders do. The bureaus simply provide the credit reports that that score is based on. But lenders dealing with business credit can use different formulas, including their own or Dun & Bradstreet’s, which can result in different scores.

Finally, you’ll find some differences in how you access a personal score versus a business one. To get a personal FICO score, which again is what lenders look at when considering a loan application, you have to pay. Yet by law, you are permitted access to a free annual credit report for your personal credit, and both reports and scores are generally private. For business credit reports, you also have to pay, but anyone can request your business’s credit report.

What if I already have excellent personal credit?

If you already have a good personal credit score, you might wonder if you need to start building business credit. Although many small businesses lean on personal savings in the beginning, it’s smart to start borrowing as a business instead of borrowing from yourself. Using personal credit cards or loans for your business contributes to only your personal credit score instead of your business credit.

Once you build up your business credit history, you can use it to more easily secure greater funding for your small business. While some lenders will take personal credit into account, a good business credit score is still advantageous. When dealing with some companies, using business credit appears more professional and increases their respect for your small business. In fact, according to the U.S. Small Business Administration, establishing your business’s credit can increase your company’s credit capacity by 10 to 100 times.² And separating your business loans and credit from your personal finances frees you from personal liability if payments aren’t met.

Seven steps to build your business credit

1. Establish your business identity

If you want your small business to build credit, lenders and credit reporting agencies need to know your business. To do that, it’s best to make your business a completely separate entity from you, the business owner, so make sure your business has these:

• Business name
• Address (distinct from the business owner’s house or apartment)
• Phone number (unique from your home or cell number)
• Legal entity, such as a partnership, S corporation, or LLC

Additionally, you need to secure an employer identification number (EIN) from the IRS. An EIN, also known as a tax number, is necessary to build business credit, even if your legal designation doesn’t require an EIN for filing taxes. You can apply for an EIN quickly and easily on the IRS website.

2. Open a separate bank account for the business

Head on over to your preferred bank or credit union and open up a savings account and checking account for your small business, and don’t forget to use your business’s legal name, address, and phone number instead of your own information. Once you’re all set up, use that checking account for your business expenses, even if you’re not legally required to do so.

When it comes to loans and other financial actions, most banks and other lenders consider the start of your business as the day you opened your business bank account—not the day you registered your LLC or corporation. So try to open that bank account soon after you register as a legal entity.

3. Get a D-U-N-S number

Dun & Bradstreet is a respected and well-known business credit bureau. Lenders all over the United States and around the world use Dun & Bradstreet’s business credit profiles and Paydex scores to find out if borrowers have a good payment history, which makes filing with this agency a priority.

To start a credit file with Dun & Bradstreet, you’ll need to request a nine-digit D-U-N-S number from them. You can do that online for free, but it might take up to 30 days. If you need it sooner, Dun & Bradstreet also offers an expedited process—if you’re willing to pay.

4. Establish trade lines with suppliers

Business trade lines work like short-term credit deals between a business and a supplier. For example, a frozen banana stand business could receive bananas immediately from a supplier through a trade line, and the supplier would receive money from the stand at a later date. These deals are often called net-30, net-60, or net-90 accounts based on the length of the term (30, 60, or 90 days respectively).

Even if your business has enough cash flow to buy the goods or services without using a trade line, you should utilize trade lines to build your business credit history. If your small business doesn’t currently have suppliers that offer trade line deals, you can always set up a trade line with a company that sells generally helpful products like Office Depot or Uline—but there are plenty of different vendors to start a trade line with.

No matter which vendors you establish trade lines with, make sure those vendors report your payments to credit bureaus: your small business won’t build up any credit unless they do. Also, remember that most suppliers will allow you to pay off your deal early, and you don’t need to accrue interest on the deal to build credit.

5. Get a business credit card or line of credit

Just like personal credit, a continuing line of credit—when managed well—can impress lenders as well as credit reporting agencies. Set up a business credit card or credit line with your bank, and use it for appropriate expenses to develop your payment history. If necessary, you can use a secured business credit card to build credit. A secured credit card is easier to obtain thanks to an initial deposit that functions as collateral for the lender.

Keep in mind that larger credit limits look more impressive to business credit bureaus. And unlike personal credit scores, using the full credit limit from the credit card issuer will not affect your business credit score negatively.

6. Consider getting loans that you don’t need

When your business needs to make a large purchase, consider getting small-business loans, even if you can skip the loan and pay the cost in cash (you can still set aside that cash for loan payments later). Although you will pay a little extra in the end, you will build up your business credit file and give yourself flexibility in the future.

7. Make your payments on time

It might seem obvious, but remember that even one missed payment will damage your business credit report. The fear of missing payments might cause some business owners to shy away from credit. Yet those businesses miss out on the credit-building benefits of punctual payments. Creditors also often raise credit limits automatically as an additional reward for using credit responsibly and paying on time.

The takeaway

To open up new financial possibilities for your business, be sure to build a strong business credit history. Take advantage of trade lines, business loans, and lines of credit, and always make your payments on time. With a little time and commitment, you can easily use your business’s credit to obtain financing for future growth.

Sources

1. National Small Business Association, “2016 Year-End Economic Report”
2. U.S. Small Business Administration, “The Importance of Building Business Credit”