How to build business credit as a sole proprietor

Quick answer: Can a sole proprietor build business credit?

Yes, if the sole proprietor has established a separate business identity with reported payment history. A business identity allows you to build business credit, even without an LLC or corporation. Payment activity tied to that business identity may help your business become scoreable once a bureau has enough qualifying information. Reported tradelines may help establish or build business credit history when the information is accepted and matched by business credit bureaus.

Building business credit doesn’t always mean you can qualify for business loans and credit cards without using your personal credit. Many lenders require a personal credit check, at least until your business has years of credit history.

How business credit works for sole proprietors

Business credit is a business’s track record of paying lenders, suppliers, and vendors. It’s one of the primary factors that determines whether your business qualifies for loans and the kind of terms it gets. Beyond loans, business credit also affects your business in other ways, including the following:

• Vendors often check business credit before offering net-30 or net-60 payment terms.
• Lease agreements with landlords and commercial equipment suppliers typically involve a credit check.
• Insurance carriers may use business credit or related business data, where permitted, to help assess risk.
• Companies that are considering a partnership could run a credit check as part of their due diligence.

When you’re a sole proprietor, you and your business are legally one and the same. Lenders and other parties may focus heavily on your personal credit to evaluate your business, especially while you’re building your business credit file.

Business credit vs. personal credit

Business credit and personal credit have separate reports and scoring systems. Business credit is tied to a business entity and based on credit reports issued by business credit bureaus. Personal credit is tied to an individual and based on information in credit reports issued by consumer credit bureaus.

Scoring systems are also different for business and personal credit. Business credit is largely based on payment history, with some scores also using credit utilization and other factors. Personal credit uses payment history and credit utilization, but it also depends on the ages of your credit accounts, your mix of different types of credit, and recent credit applications.

Although these are two separate types of credit, business financing often affects both. If you apply for a business credit card or loan, the lender may check your business credit and personal credit. Many business cards and loans require a personal guarantee, meaning the owner and the business are liable for the debt. Negative outcomes, such as a default, can also damage business and personal credit.

Where personal and business credit still overlap

Step 1: Set up your business identity

The first step to building business credit is a separate business identity. You’ll need a business name, and it’s also a good idea to get an EIN, a business bank account, business contact information, and an industry code.

Choose and register your business name

Choose your business name carefully, as a good business name is a valuable asset. It should not be in use by a competitor, and ideally you’ll want to secure the domain name and social media handles as well. A free business name generator can help you come up with ideas. 

Register your business name with your state. This is usually done with a fictitious business name filing (also known as “doing business as” or “DBA”). Once you’ve registered your business name, use it consistently. Business credit bureaus rely on business name and address data for reporting purposes. If you don’t use the same business name, it could lead to multiple files for your business or data getting lost.

You could register your business under your own legal name, but a separate business name is normally better. If you use your legal name, data could get mixed up between your business and personal credit. A DBA helps establish a brand for your business. It also ensures that lenders and suppliers treat your business as a business. If you use your legal name, they may look at your business as a consumer account.

Watch out for these common business name mistakes that can lead to mismatched information or multiple credit files for your business:

• Switching names or addresses.
• Using multiple spellings of your business name.
• Registering under slightly different names in different states.
• Using inconsistent punctuation or abbreviations for your business name.

Get an EIN even if you can use an SSN

An employer identification number (EIN) is a type of tax ID number used by small businesses. Think of it like your business’s Social Security number. It’s not required for your sole proprietorship, but getting one can be helpful as you establish your business identity and business credit.

The advantage of an EIN is that it’s an identifier used by each of the business credit bureaus. When your business has an EIN, it helps the bureaus match payment data to your business. An EIN also demonstrates that your business is a separate entity when working with lenders, suppliers, and vendors.

You can apply for an EIN for free online, by mail, by fax, or by phone. Here are the main items you’ll need:

• Business name.
• Business address.
• Your legal name.
• Your Social Security number or individual taxpayer identification number (ITIN).

Open a business bank account and separate finances

While a business bank account isn’t required to build business credit, it’s important for separating personal finances from business finances. A business checking account helps you track business expenses and revenue for tax purposes. It also gives your business more credibility than if you were managing everything from a personal account.

In addition, many small business lenders require financial statements during the application process for small business loans and financing. A business bank account looks more professional and makes it easier for lenders to evaluate your business income.

Here’s how you can quickly set up a business bank account:

• Open a business bank account using your business name.
• Make sure all business income goes to your business account.
• Use the account to pay all business expenses.
• Never mix personal and business finances.

Set up your business contact footprint

Whether it’s registering a business name or filling out a loan application, there are times you’ll need to list a business address and phone number, so think through what you want to use ahead of time.

If you have a home-based business, you can use your home address and phone number. Just know that your address and number will become part of your business record, which is available in public databases. If you prefer to keep that information private, you can set up a virtual office address for your business address and a second phone number for your business number. Services like Google Voice, Sideline, and Quo are a few options to get a separate business phone line.

Whichever option you choose, maintain consistency across business filings and applications. Alternating between a home address and a virtual office address can lead to multiple business identities and slow down your progress on building business credit.

Here’s a recap of what you should set up for your business:

Identify your industry code

Businesses are often identified using industry classification codes: Standard Industrial Classification system (SIC) and North American Industrial Classification System (NAICS) codes. You may need to provide an industry code when you register for a D-U-N-S Number, apply for a business loan, or set up a vendor account, to give a few examples.

Having the right industry code matters because it ensures the information on your business credit file is accurate. If your industry code doesn’t fit your business, it could be a red flag for anyone reviewing your business credit. Your industry code is also something lenders use during the underwriting process to evaluate the risk of your business. An inaccurate code may lead to your business receiving inappropriate loan terms.

Research the proper classification code for your type of business so when you are asked for it, you’ll know what to use. Here’s how to choose an industry code:

• Find the NAICS code first, as that’s the more widely used system.
• After choosing an NAICS code, look for the corresponding SIC code.
• Use the official code lookup tools – the U.S. Census Bureau has an NAICS code lookup and OSHA has a SIC code lookup.
• Pick the most specific code available for your business. Each code system has categories and subcategories.
• If your business fits under multiple categories, choose the one that generates the largest portion of your revenue.

NAICS codes and/or SIC codes may also appear on business credit reports. When you’re checking your own business credit report, make sure that any industry code that appears there is correct. Be consistent with the code you use, because using multiple codes can lead to issues later.

Step 2: Make sure your business is visible to business credit bureaus

Your business won’t automatically have a business credit file just because you’ve gotten an EIN or registered it with your state. Business credit bureaus will only start a file for your business when they receive information about it. You can make the process go more smoothly by taking the first steps and checking that bureaus have consistent business identity data.

Get your business file started

You can create your business file with one commercial credit bureau, Dun & Bradstreet (D&B), by registering for a D-U-N-S® Number. This is D&B’s identification number for businesses, and the sign-up process is free online. Once you have a D-U-N-S Number, your business has a credit file with Dun & Bradstreet, although it won’t have a credit score until there’s payment information on that file.

Before you register, search for your business on the Dun & Bradstreet website. This bureau sometimes auto-generates files based on public records data, and if that’s the case for your business, then it already has a D-U-N-S Number.

The other two major commercial credit bureaus, Equifax Business and Experian Business, have their own identification codes. You can’t register for these yourself. Each bureau generates a business credit file and identifier for your business when they have enough data on it.

Do a quick “file check” before you start applying

Before you apply for any tradelines, search for your business at the three major commercial credit bureaus: Dun & Bradstreet, Equifax Business, and Experian Business. If you find a credit file, check that the business information matches, including the name, address, phone number, EIN, and industry code.

If a credit file has inaccurate information, it’s important to correct that first. Otherwise, payment data from tradelines you open may not find its way to your business file. The process for fixing inaccurate information depends on the bureau:

• Dun & Bradstreet provides an online portal where you can update your business’s file.
• Equifax Business requires that you contact its customer support.
• Experian Business has an online dispute process.

Step 3: Add tradelines that report

A tradeline only helps build business credit if it reports payments to the credit bureaus. Start small, with one to two accounts you can easily manage, and then add more as you feel comfortable.

Start with vendor and net terms accounts

Many vendors offer trade credit, which is short-term financing for goods and services. It’s often easier to qualify for trade credit than business loans because there’s a less stringent underwriting process and the vendor is making a sale in the process, not lending money.

These accounts typically express payment terms as net-15, net-30, net-60, etc. For example, with a net-30 account, your business has 30 days to pay the invoice.

Here’s a checklist to use when picking vendors for trade credit:

• 
  You already buy from them.
• 
  They report to the commercial credit bureaus.
• 
  They offer clear credit terms.
• 
  You can pay invoices on time or early.

Trade credit can be useful for financing orders and building business credit, but there are also potential risks. Watch out for minimum purchase requirements that force you into larger orders, late fees or interest if you don’t pay on time, and overreliance on a single supplier. Vendors can often change credit terms, and if you have one main supplier that tightens its terms, that could have a significant impact on your business.

Add a business credit card as a sole proprietor

Business credit card applications normally require a personal credit check and a personal guarantee from the business owner. Because the business owner has to guarantee the card, issuers are often open to approving new businesses. Even if a business doesn’t have much or any revenue yet, the issuer can approve the application based on the business owner’s personal finances.

Follow these steps to improve your likelihood of being approved:

• Build your personal credit score. Many small business credit cards are intended for applicants with good or excellent credit.
• Separate your business and personal finances. Issuers typically ask for business income, personal income, and expected business spending.
• Provide consistent business information. If the information doesn’t match what’s on file for your business, it could raise a red flag with the issuer.
• Apply for business credit cards strategically. A large number of applications in a short period of time can cause your credit score to drop and make approval more difficult.

Consider installment credit only when it fits the goal

Some small business loans and lines of credit report to your business credit file. However, you should only use this if your business needs working capital. If you’re considering it solely to build business credit, there are other ways to accomplish that goal without paying interest.

Before you borrow any money, verify the following:

• 
  Will the lender report it to the business credit bureaus?
• 
  What’s the total cost of repayment?
• 
  Can you make the required payments?

Use credit-building services carefully

A business credit-building service is typically a bill that reports as a tradeline. You pay a monthly subscription, and the service provider reports the payment on your business credit. Although this can be an effective way to build business credit, you should take a few precautions:

• Consider if the service is worth the cost, or if you’re better off using trade credit or a business credit card.
• Check for cancellation fees.
• Find out where the service reports payments (ideally, to all three major business credit bureaus).

Corporate cards and no personal guarantee options

Most traditional business credit cards require a personal guarantee. As the business owner, you’re personally liable for business debt on the card. Corporate cards are normally no personal guarantee business cards, meaning you’re not personally liable for the balance.

Corporate cards typically require much stronger business finances. Your business may need substantial revenue, cash flow, and multiple years in operation. Because of the financial requirements, corporate cards aren’t common as a first move, but they may be worth looking into later on.

Step 4: Use business credit the way scores reward

Once you have tradelines that report on your business credit, you need to use those tradelines correctly so they have a positive impact.

Pay on time and build trust

Payment history is the most important factor in your business credit score. It’s a good idea to use autopay or payment reminders to ensure you always pay on time.

If possible, consider paying tradelines early. Unlike personal credit, where there’s no difference between paying early or on time, some business credit systems issue higher scores for paying early than paying on time.

Manage utilization and low limits

Credit utilization, or the percentage of total credit that you use, is another significant part of business credit. Getting close to your credit limit or maxing it out is generally bad for your business credit score.

Managing utilization is often hardest early on for new sole proprietors who start with low credit lines. To keep your utilization reasonable, you may want to make multiple payments per month. Or, base the amount you spend on your credit limit, leaving a healthy buffer so you don’t use too much.

Here are a few common mistakes to avoid with credit utilization:

• Running up high balances regularly.
• Getting into the habit of maxing out tradelines before paying them off.
• Not requesting higher credit limits.

Avoid negative public records and clean up issues fast

Business credit bureaus actively monitor public records. Negative items, such as judgments, collections, liens, and bankruptcy filings, can damage business credit, even if it has several tradelines with strong payment history.

Follow these steps to fix public records issues for your business:

• Confirm the accuracy of the issue. If it’s an error, file a dispute.
• Find a way to resolve the issue. For example, if it’s a collections account, work on paying it off or negotiating a settlement.
• Ensure that your business credit file is updated with the latest information once you’ve resolved the issue.

Step 5: Monitor and protect your business credit

It’s important to monitor your business credit so you can track your progress and catch fraud and identity theft as early as possible.

What to check on your reports

Here’s an audit list you can use each time you check your business credit:

• Review the accuracy of your business’s name, address, and industry code.
• Ensure that all your tradelines are present and reported correctly.
• Check the payment status of each tradeline.
• Look for any negative items and figure out how you can fix them.

How to dispute errors and update business info

The dispute process depends on the type of error. If your business credit has inaccurate information from a creditor or vendor, contact them first and ask that they correct it. If the creditor or vendor refuses to fix an error, then you should file a dispute with the business credit bureau.

Inaccurate business information is an issue you handle directly with the credit bureau. Each bureau has an online process to correct the information on file about your business.

Proper documentation makes a big difference when filing disputes. Save your invoices, proof of payment, messages with creditors, and business registration documents. You’re more likely to win a dispute if you have evidence to support your claim.

The dispute process can take some time, as the credit bureau will need to investigate your claim. It’s best to wait 30 days before following up.

Watch for business identity theft

Businesses are often a target of identity theft. Common red flags include address changes on your business credit file and accounts or credit inquiries you don’t recognize.

If you’ve been the victim of business identity theft, here’s what to do:

• Contact creditors to notify them of fraudulent accounts that you didn’t authorize.
• Dispute fraudulent accounts on your business credit file.
• Keep documentation of everything, including the fraudulent accounts, as well as your contacts with creditors and credit bureaus.
• Continue to monitor your business credit.
• Consider signing up for a paid credit monitoring service that immediately alerts you to any changes.

Should you stay a sole proprietor or form an LLC?

Staying a sole proprietor is the easier option, and it doesn’t cost you anything. You can also start building business credit today as a sole proprietor. However, full separation of business credit may require forming a business entity, and a sole proprietorship doesn’t provide any legal liability protection.

Since an LLC is a separate business entity, it provides full separation, which helps build business credit. It also gives you some protection from being held personally liable for judgments against your business. Forming an LLC is a straightforward process, especially with a business formation service, but there are administrative fees, including formation fees and ongoing fees.

A simple decision framework

Stay a sole proprietor if you:

• Are OK without full separation between personal and business credit.
• Don’t want to deal with the administrative requirements and costs of an LLC.
• Aren’t in a high-risk industry.

Form an LLC if you:

• Want to build a completely separate business credit profile.
• Plan to eventually apply for business financing with only your business credit.
• Are in a high-risk industry where your business could be involved in a lawsuit.

Bottom line

Building business credit is one of the steps toward establishing a financially healthy business. You can build business credit as a sole proprietor, so you don’t need to switch business structures to start the process.

You typically won’t get full separation of your personal credit and business credit, which may be something to consider depending on your plans for your business. If that isn’t an issue, or you just want to start building credit right away, you can do that as a sole proprietor.

Frequently asked questions