Building business credit can benefit your small business in myriad ways. It can make it easier (or less expensive) to get certain types of financing, business insurance or payment terms with suppliers. It can even help your business land lucrative business contracts.
Here we’ll share simple steps to establish and build business credit to help your small business grow.
Why is it Important to establish business credit?
Your business can have its own credit reports and scores. Anyone can check business credit, so it may be used by lenders, suppliers or even companies deciding whether to do business with you. Good business credit may help you qualify for small business loans or financing, as well as help you secure financing at more favorable terms or lower interest rates. Since there is no requirement that companies notify you when your business credit is reviewed, however, you may never know how your credit history has affected your business.
At the same time, there are misconceptions that if a business has good business credit, the owner’s personal credit will never be checked, and that they will no longer have to provide personal guarantees for a business loan. The reality is that many small business lenders check personal credit, and that some loans, including bank loans or SBA loans, will require a personal guarantee.
Does your personal credit matter for your business?
Both personal and business credit are important if you’re a small business owner. It is not uncommon for lenders to require personal credit checks for small business loans. Here we’ll focus on how to build business credit, but be sure your personal credit scores are good as well.
The good news is that you can start building business credit even if your personal credit isn’t strong.
How to build business credit
Major business credit bureaus maintain business credit reports. The key to building good business credit scores is to do business with companies that report payment history, and then to pay on time and keep debt levels manageable.
It really can be that simple.
However, there are some nuances that make the process of establishing business credit a little tricky for some entrepreneurs, so we’ll break it down here into step-by-step instructions.
7 steps to establish business credit
- Build your foundation
- Register your business
- Get a D-U-N-S number
- Get accounts that report
- Open a business credit card
- Pay on time
- Monitor your credit
1. Build your foundation
To effectively establish business credit, it helps to properly establish your business. If your business is new, take the time to set up your business so it appears professional to both clients and lenders.
Get a business phone number and, if possible, get it listed in directory assistance. Get and use a professional email address. Choose and consistently use a business address, which can be P.O. Box or even your home address if you’re just getting started.
Why is this important? Business details such as these may appear on your business credit reports and you want to maintain a consistent, professional image.
2. Register your business
Most businesses should be officially registered with their state. If you formed a business entity such as an LLC or S Corp in your state, you should have completed this step. Annual filings will likely be required. (If you formed your business in another state, you may also need to register your business in the state in which you do business.
If you are operating as a sole proprietorship or independent contractor and have not registered your business, you can file a fictitious business name with your state. (This is sometimes referred to as a “DBA”.)
In either case, you may need to get professional or business licenses. Check your state requirements.
Why is this important? Public information such as this may be used by some commercial credit agencies to start your business credit profile.
3. Get a D-U-N-S number
A DUNS number is your business identifier with the credit reporting agency Dun and Bradstreet. If your business doesn’t already have one (you can check whether it does for free), you will want to request one. It’s free.
Creditsafe, Equifax and Experian all have separate identifiers (numbers to identify your business in their systems) but you don’t have to initiate this type of request with them.
An EIN is the business equivalent of a Social Security number. The IRS requires some businesses to get an Employer Identification Number (EIN), but having one is not required to establish business credit. However, some business financial applications may require an EIN, and EINs may be reported to business credit reports.
Why is this important? It ensures your business is visible to D&B.
4. Get accounts that report to business credit agencies
The most important part of any credit report is information on how you’ve paid your bills. Past payment history is used to help predict how likely your business is to pay on time in the future. That means you need accounts that will report to business credit bureaus, and not all do. Ideally you’ll want to establish at least 2-3 accounts with companies that report. More can be helpful as your business grows.
These may include:
No lender or vendor is required to report to business credit; some do and some don’t. Some may report to one or two of the major commercial credit bureaus, but not others. So if your goal is to build business credit, you must choose accounts that report.
Why is this important? If you don’t have any accounts with payment history, you’ll likely have no business credit report or a report with a low credit score.
5. Open a business credit card
Opening a business credit card that reports to the major commercial credit reporting agencies is a great way to establish business credit. You can benefit from perks such as cash back or travel rewards, but you can also use one of these cards to build credit.
Most small business credit cards will use the owner’s personal credit scores and income from all sources to determine if you qualify. That means they are available to startups as well as established businesses.
You definitely should have at least one open business card if you qualify, but more than one can also help. However, be sure to use caution and avoid getting overextended as that can hurt your business credit scores.
If you don’t qualify for a business credit card, you can skip this step but come back to it in the future when your personal credit history has improved.
Why is this important? Business credit cards can help establish credit when paid on time.
6. Pay on time
Payment history is the most important factor for any type of credit scores, and especially so for business credit. Business credit reports use a term called, “Days Beyond Terms” (DBT) that describe how many days beyond the due date a payment was made. For example, if your terms with a vendor is “net-30,” and you pay on day 32, the account will be reported as 2 DBT. Yes, that means your business credit score can be affected if you pay just a day or two late.
Pay on time or early if you can, and you may build your business credit score more quickly.
Why is this important? Payment history is the single most important factor for building business credit.
7. Monitor your credit
Diligently monitoring your business credit history can help you monitor your progress as well as spot mistakes. If you do find an error, be sure to file a dispute with the credit bureau reporting the mistake.
Be sure to check your credit reports and scores with more than one major credit reporting agency to find out whether your accounts are helping your scores, and if not, consider adding additional credit references.
Why is this important? Monitoring your business credit can alert you to problems so you can investigate further.
How long does it take to establish business credit?
It may take a few months before new accounts appear on your business credit reports. Once they do, you’ll need several months of on-time payments to establish a good business credit score. Whether you have a new business or one that is well-established, if you take the steps above, you may be able to establish a good business credit rating in several months to a year.
What is the starting credit score for a business?
Business credit scores have different ranges. The Experian Intelliscore and the D&B Paydex score both start at 0 and go up to 100. Other scores may start at a different number. If your business hasn’t established credit, you may have a low credit score or no credit score at all.
What types of business entities have business credit?
You can establish business credit with any type of business structure including LLC’s, S corporations or C corporations. You may even be able to establish business credit as a sole proprietor or independent contractor with a business name. However, keep in mind that without a legal business entity, you’ll never be able to truly separate your business and personal credit.
Can you get business credit with an LLC?
A business operated as a Limited Liability Company (LLC) can establish business credit. Once you have formed your LLC, you can begin building a business credit file using the steps in this article.
Can a personal credit card help build business credit?
No. Personal credit cards are reported to consumer credit bureaus, not business credit bureaus, and therefore will not help build business credit. That’s true even if you use one to pay for business expenses.
Will a business checking account help my business credit score?
Business bank accounts do not typically report to business credit or directly impact your creditworthiness. It’s still a good idea to get a business checking account to separate your business and personal credit. Many small business lenders require business bank statements when evaluating loan applications.
What types of small business loans report to business credit?
Any lender may choose to report accounts to business credit reporting agencies. Many traditional lenders such as banks, report lines of credit and loans to the Small Business Financial Exchange which is not a credit reporting agency, but collects information that may be included in business credit reports that are sold by SBFE Certified Vendors like the major business credit bureaus.
Why don’t all of my accounts appear on my business credit reports?
Business credit reporting is a completely voluntary system and no lender is required to report. Keep in mind that some lenders report to SBFE and you won’t see that information on your business credit reports. But those accounts may still appear on certain reports ordered by lenders.
How can I add accounts I already have to my business credit reports?
Most credit bureaus require lenders and vendors to report accounts directly to them before they will include them in business credit reports. You may need to seek out companies that report. In addition, you may be able to use a service like eCredable Business Lift to report accounts your business already pays.
Can I establish business credit without debt?
Yes, you can estalish business credit without debt. One way is to use supplier or vendor net-30 accounts that report to business credit. You’ll be required to pay the balance in full in 30 days. You can use Nav’s Business Boost or Business Loan Builder which include tradeline reporting to major business credit bureaus. And finally you can use a service like eCredable Business Lift to report accounts your business is paying.