When you are a business owner, you should want to build good credit for your business and build it fast, right?
With great business credit comes a host of benefits, saving you a ton of time and money.
But maybe you’ve run into some of these challenges in building business credit:
- Banks ask you for a personal guarantee
- Everything is tied to your personal credit scores
- You are looking to get approved for larger loans and credit limits for your business
- You are costing your business too much in interest
- You have several delinquencies in your personal credit reports from before you started your business
- You are unable to get approved for credit cards that can save your business money through rewards programs
With all of these many challenges, how are we ever to accomplish better business credit?
Click "READ MORE" to know the secrets of establishing a good business credit!
Disclaimer: The following article is for informational purposes and does not constitute legal or accounting advice. Please consult your own certified tax, legal and accounting advisors before taking any actions for your business.
What is Business Credit?
Similar to personal credit scores, business credit scores are essentially a number that measures how risky you are as a borrower of money, or in this case, how risky your business is.
Business credit scores are affected by:
- Public records
- Size of your business
- Age of your business
- Credit limits
- Liens or bankruptcies
- Your businesses payment habits with delinquencies on outstanding balances having a major impact.
Similar to your personal credit scores, overall your business will be measured by its “creditworthiness.”
Each of the 3 major business credit bureaus collects data and produces its own credit reports and will typically provide credit scores along with the reports they provide:
Each of the credit bureaus uses different algorithms and presentation styles for its own scoring systems. Simpler, less expensive credit reports may only include one credit score, like a payment index (see below). More complex reports will usually cost more and include more scores, but on average the scores you see will fall into three categories:
- PAYDEX or Payment Index: A scale of 1–100 that indicates how promptly a business has paid its most recent bills.
- Business Creditworthiness or Credit Score: Scale varies by credit bureau; A bit like a personal credit score, it estimates the likelihood that a business will be delinquent on payments over the next 12 months.
- Business Failure or Financial Stability Score: Estimates how likely a business is to fail or experience severe financial distress over the next 12 months.
In many ways, building good business credit shares these 7 benefits with good personal credit:
- Increase the likeliness of getting approved for loans
- Get approved for bigger loans and higher credit limits
- Get lower interest rates on loans, insurance, and credit cards
- Increased approvals for rental property
- Get access to business credit without a personal guarantee
- Improve your relationships with various merchants and supply sources
- Most importantly, improving the reputation and authority of your business
Until you establish a business credit file though, lenders will be typically checking your personal credit history when you apply for loans. But just as individuals need to build up a personal credit history from scratch, businesses have to start somewhere to begin the process of building good credit, especially if the company hasn’t been around long.
Luckily, by following these 14 steps, you can work towards just that.
14 Steps to Building Business Credit
Establishing your business credit files is important for giving your business an identity by which it can be officially measured by the bureaus to build authority and trust for your business, as well as building good credit.
And speaking of the actual credit, this is the important second phase that is essential for reaping the many benefits for your business listed above and for overcoming the challenges new business often face for up to many years when not taking the necessary steps to make a positive impact on their credit scores.
Let’s look at the individual steps needed to make your goal a reality.
1. Obtain a Separate Business Address & Phone Number
2. Officially Incorporate Your Business
There are 8 types of legal entities you can file under:
- Sole proprietorship
- Limited Liability Corporation (LLC)
- C Corporation
- S Corporation
- B Corporation
- Close corporation
- Nonprofit corporation
If you structure your business as a sole proprietorship or as a partnership, liability will fall on the individuals involved, and an LLC will protect you from personal liability most of the time when it comes to your personal assets in the case of bankruptcy or lawsuit.
By structuring the business as a corporation, you allow the business itself to be taxed and be held legally liable. Besides offering the strongest protections from personal liabilities, corporations are able to go public and have shareholders. If you are starting a nonprofit corporation, you are eligible for tax-exempt status.
Much like how every individual’s personal financial situation is different than another’s, the business owner or partners who are running the business together have to choose the right way to incorporate the business, so review your business needs carefully and you’ve taken the first step towards building up your business credit file.
3. Get Listed in Online Business Listing Directories
Make sure you list your business name, address, website, and business phone number to the listings. There are even services like Yext or Brightlocal that can help you automate the process if you have multiple locations in multiple states and need to scale the process beyond manual work.
4. Apply for an Employer Identification Number with the IRS
You will need a Taxpayer Identification Number (TIN) to apply for an EIN, which can be a Social Security number or an Individual Taxpayer Identification Number.
5. Register with a Dun and Bradstreet to Get a D-U-N-S® Number
It is free to apply for one, and by doing so, you can establish a basic credit profile with D&B, marking the next step towards building business credit fast.
6. Open a Business Checking and/or Savings Account
This is another step in building up separate business credit scores and gives the credit bureaus another look into the transactions made by your business, and will open the door to better loans and credit accounts in the future after lenders see an established business account.
Use the business account to pay all financial transactions for the business including any business loans and credit card bills.
7. Check Your Business Credit Report Regularly With 3 Bureaus
to look for any errors that shouldn’t be on there, and dispute them if need be.
You want to be sure your business is being reported accurately, especially as you are just starting out and building its reputation. Checking these reports regularly is important as your business is growing.
Since checking your reports registers as a soft inquiry, you don’t have to worry about it dinging your credit scores. Hard inquiries, like when you are applying for several new credit cards or other loans in a short period of time, can negatively affect your scores.
8. Get Credit with Vendors/Suppliers/Lenders Who Report to Credit Bureaus
A common payment system set up for businesses to have you as a vendor pay on “Net X day” terms. Common terms are:
- 15 day
- 30 day
- 60 day
- 90 day
Net 30 refers to a payment system in which a business can make normal purchases on credit, with the full bill due in 30 days. 30 days is the most common, but the business can be set up with the varying payment ranges above. What this does is set up your business to make normal purchases on credit through the merchant that needs to be paid in full by the period of time agreed upon.
Not all vendors and merchants report your business transaction history to the credit bureaus, and in some cases you might even have to fulfill certain prerequisites before a company will report your business payment history with them, so find out who will be reporting before assuming so.
9. Open a Business Credit Card
For newer businesses, you generally have to personally guarantee your business credit accounts, but as your business grows, you may eventually be able to get cards without a personal guarantee. Most business credit cards will report to at least one of the business credit bureaus, or to Small Business Financial Exchange, but how each card reports will depend on the issuer, and card issuers don’t always publicly disclose which bureaus they report to.
10. Keep Your Business Information up to Date
Just as it is important to monitor the reporting from each of the business credit bureaus regularly to make sure they are accurate on the bureaus' end, you also have to do your part to keep your businesses information up to date and accurate.
Make sure listings are current, and the credit bureaus have the most up to date information for any changes that your organization goes through.
11. Make Your Payments On Time & in Full, if Possible
12. Keep Your Credit Utilization Percentage Lower
This will have a strong positive effect on your credit scores, and your business will save money faster than if it is carrying a revolving balance, accruing interest month-to-month.
13. Don’t Neglect Your Personal Credit
14. Stay Persistent & Patient
After all of these steps have been completed, it is important to keep up with these important practices over time, making responsible decisions for your business, staying on top of your debts, and evolving when the needs of your business demand it.
Building Good Business Credit Is Worth the Effort
We know you can accomplish your goal of building your business credit; just take it one step at a time and persevere through it all.
If you think we’ve left out a step or you have something else we should correct or add, please take a minute to leave us a comment below.
Here’s to your business credit success!