Figuring out how to access business financing and credit is a common quest for both new and existing small business owners. From start-up costs to new expansion strategies, establishing a strong business credit profile with diverse accounts can help make or break your immediate and future business plans.
Why Should I Learn How to Establish Business Credit?
If you’re reading this, you already know that good credit (both consumer and business) is important for the future of your venture, but let’s explore the benefits a bit more.
Strong business credit scores can help business owners secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry. In the long run, this will help you save money and access the funds or assets you need to help your business grow. (Nav customers can use the BusinessLauncher tool in their free account to start building a business credit profile.)
In fact, one of the primary reasons business owners are denied funding is due to a failure to understand their credit. Nav’s 2015 American Dream Gap Report found that nearly one in four businesses don’t know why their loan applications are denied, yet businesses that understood their business credit scores were 41% more likely to get approved for a small business loan.
Additionally, a big issue with financing a business is dealing with personal guarantees. A personal guarantee is a promise from a business owner that they are responsible for their business’s debt should the business be unable to pay the debt. 86% of businesses use their owners’ personal credit to fund their entrepreneurial dreams, and establishing business credit can help you draw a clear and important line between your personal and business finances and mitigate the need to sign a personal guarantee for business funds.
Get free personal AND business credit scores
*Sign up for a free Nav account. Signing up won't hurt your credit scores
By clicking "Sign Up" above, you confirm that you accept the Terms and Conditions, acknowledge receipt of our Privacy Notice and agree to its terms.
8 Steps to Establishing Business Credit
At this point you’re probably thinking “Yes, I get it. It’s important. Can you please tell me how I can get this party started?” Much like a great party takes some planning and coordination, establishing and building credit takes time and effort. However, these tips on how to establish business credit can help you bring your plans and aspirations to fruition.
Put Your Business on the Map.
Just because you’re open (or about to open) for business, doesn’t necessarily mean you’ve put yourself on the map. You can’t effectively establish credit until you’ve established your business! Get a business phone number and have it listed in the directory. Every credible business should have one. You’ll also want to open a bank account in your official (legal) business name, and regularly use it to pay your bills.
Establish and Maintain Good Credit Relationships with Suppliers and Vendors.
In the world of business, a solid line of credit with industry relevant vendors or suppliers is like gold. The better your relationship, the more likely you are to avoid paying upfront for items or services. If you can secure a line of credit or payment terms such as net-30 with just a few (3-5) vendors or suppliers that report those payments to business credit reporting agencies, you can establish a positive business credit history.
Your vendors aren’t required to report to credit bureaus, though, so you may need to be proactive and open accounts with those that do. Here are three vendors that report payments to business credit bureaus, and that are flexible when extending credit.
Obtain an Employer Identification Number.
A Federal Tax Identification Number, or EIN, is like a Social Security Number for your business. You’ll need one of these to incorporate, and you may need one to open a bank account under your business’s name or secure business contracts.
Pay On Time All the Time.
This is probably the number one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. Late payments, especially severely delinquent ones, will bring down your credit score and negatively impact your business credit profile.
Open a Business Credit Card.
Opening a business credit card with a company that reports to the major credit reporting agencies is a great way to establish business credit. You definitely should have at least one open credit card, but more than one can also help. However, be sure to use caution and avoid over extending your business finances. Just because the credit is there, doesn’t mean you need to (or should) utilize all of it. (Find business credit cards that match your credit profile using a free Nav account.)
If you haven’t already, seriously consider getting incorporated. By adding Inc. or LLC to your business, you’ll be legally separating your business and personal profile. If you choose not to do this, your business and personal credit history (among other things) will be legally attached.
Transition Commercial Expenses Away from Personal Finances.
Given the steps above, this is fairly redundant, but none the less important. By opening credit cards, lines of credits, and bank accounts in your business’s legal name, you’ll be separating yourself. Add on your new Inc or LLC, and you’ll be creating plenty of distance. Clearly separating your expenses also makes it a lot easier to manage taxes!
Monitor Your Credit.
25% of small business owners have reported significant errors on their credit reports. Diligently monitoring your business credit history can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency. (Sign up for Nav get an alert when your business credit profile has been created with Dun & Bradstreet or Experian.)
How to Build Business Credit
Once you have established business credit, your next step is to build strong business credit. Many of the steps above will help you do just that, but it’s important to focus on two specific steps to help you boost your commercial credit history.
The first step is to pay early. In the advice above, we mentioned how it’s important to pay on time. But with some business credit scores, you can in essence get “extra credit” for paying your bills before they are due. Payment information on business credit reports is often more detailed than on personal credit reports. Pay faster if you can, and you may build your business credit scores more quickly.
The second piece of advice for building good business credit is to make sure you have accounts reporting to the various business credit agencies. Again, not all vendors and lenders report to all commercial credit agencies. For example, your business credit card issuer may report to SBFE but not to D&B; you won’t know until you check your reports.
So 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. With Nav’s Premium Plus subscription you’ll see your business Experian Intelliscore, D&B Paydex Score and your FICO SBSS score.
Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).
This article was updated on May 29, 2019.