At some point in your journey as an entrepreneur, you’re sure to come across the term “business credit.” However, if you’re like many business owners, you may wonder what does business credit mean?
Business credit is a company’s ability to buy something now and pay for it later. By establishing a good business credit rating, you may make it easier to borrow money when your company needs it.
Keep reading for a breakdown of how business credit works, how to get it, and the benefits your company can enjoy when you establish a solid commercial credit rating.
How to Get Business Credit
The formula to earn solid business credit scores isn’t difficult to understand. Your business needs to open commercial credit accounts and manage them well. But that’s putting the cart before the proverbial horse, so to speak.
Before you try to open accounts for your company, it’s best to set up your business properly so it will be in a better position to qualify for financing. The following five tips can help:
Establish Your Business as a Separate Legal Entity
When you form a separate legal entity for your company (like an LLC or corporation) it can make it easier to create a business credit file and, eventually, qualify for business financing. It may also provide tax advantages and could protect you from some of the personal liability you might face as a sole proprietor.
1. Register your business
Depending upon where your business is located, you’ll likely have to register with your Secretary of State. In many states, this is part of the incorporation process you will complete when you set up your LLC or corporation. Nonetheless, it’s a good idea to double-check with your Secretary of State to confirm you’ve completed all of the necessary business registration requirements.
2. Request an Employer Identification Number (EIN) from the IRS
An EIN is like a Social Security number for your company. You’ll use it to identify your business when you pay taxes to the IRS. An EIN is also important when you fill out applications for business financing, like business credit cards and loans, and when you open a bank account in your company’s name.
3. Open a business bank account
Having a separate business bank account can make your company seem more credible in the eyes of lenders. The health of a business is frequently measured by reviewing the cash flow in and out of its business bank account. A business bank account can also help you keep your corporate and personal finances separate – avoiding accounting issues and challenges at tax time.
4. Get a dedicated business phone number
You don’t have to sign up for an expensive phone service if your business doesn’t need it. However, getting a dedicated phone number for your company is a must if you want to appear credible to lenders and service providers (not to mention your customers). Remember to get your business phone number listed in your local directory as well.
Types of Business Credit
Once you’ve put your business on the map by completing the four steps above, you can start thinking about which accounts you want to open to establish your business credit profile. Even as a startup, you have options.
Here’s a look at the four primary types of business credit your company can try to obtain.
1. Installment accounts
Commercial installment accounts are business loans where you borrow a fixed amount of money. You repay the lender a fixed payment amount over a fixed period of time. Notice the trend? Your interest rate is also fixed and doesn’t change from month to month.
2. Revolving accounts
The two main types of revolving credit you can open for your business are lines of credit and small business credit cards. With revolving credit, you can borrow money up to a preset credit limit. Once you pay down your balance, you’re free to charge up to your credit limit again, as long as the account remains in good standing.
With a credit card, your business doesn’t have to pay back the full amount charged in a given month. Rather, only a minimum payment is due. But it’s wise to pay off your full account balance each month, even if it isn’t required. Doing so can help you avoid expensive interest fees and keep your credit utilization rate low. Some business credit scoring models will reward you for maintaining low utilization on your credit cards.
3. Vendor accounts
Vendor accounts, sometimes called net-30 accounts, let your company pay for products and services after you’ve purchased them. You can buy now and pay later, typically within 30 days. However, net-90, net-60, and even net-15 terms may be offered by certain companies instead.
With many types of business credit, you’ll need to sign a personal guarantee to open an account. A personal guarantee makes you a co-signer for your business card or small business loan. If your business fails to pay back its debt as agreed, you agree to be held personally liable.
Good personal credit can be an asset and may help you qualify for business credit, but you shouldn’t sign a personal guarantee without understanding the risks. You’ll be putting your personal finances and credit on the line if your business can’t keep up with its payments. Note that personal guarantees may be required, especially for bank loans or for financing to younger businesses and those without strong business credit.
Business Credit Reporting Agencies
You’ve probably heard of the three major consumer credit bureaus – Equifax, TransUnion, and Experian. But did you know that there are a number of major business credit reporting agencies as well?
- Experian Business
- Equifax Business
- Dun & Bradstreet
Just like the consumer credit bureaus collect data about you personally, business credit bureaus collect data about your company and how it manages its credit obligations.
Get Business Credit Accounts That Report
When you open a business account, the creditor or vendor must report your account activity to a business credit reporting agency before the account can help you establish credit.
Need help finding accounts that report to the business credit bureaus? Start with vendor accounts and business credit cards.
How Information Is Added to Your Business Credit Report
The business credit bureaus use information submitted by creditors and vendors (a.k.a. data furnishers) to create credit files for businesses. Once you have a business credit file with a commercial credit reporting agency, a business credit report on your company can be created and sold to others who wish to review it.
Naturally, a vendor or lender might want to access your company’s credit report when you apply for business financing. However, there are other reasons a company might want to review your business credit as well.
Insurance companies, for example, may review your business credit when you apply for a new policy. The condition of your business credit can even affect your insurance premium. Businesses who are considering working with your company might also review your commercial credit to assess the health of your business. They also could look up information on your business through the Small Business Financial Exchange.
No Right to Privacy
Anyone can review your business credit reports for any reason. There’s no right to privacy when it comes to corporate credit reports. The business credit bureaus can sell your credit information to anyone they wish.
This is one more reason why working to establish and maintain strong business credit is an important responsibility to add to your to-do list. Lenders and vendors that you may want to work with in the future can pull your business reports at any time.
Business FICO Score
Your business may have not one, but many credit scores. You’re probably familiar with FICO Scores from personal lending. If you ever purchased a home, financed a vehicle, or opened a credit card account, there’s a good chance your lender reviewed a personal FICO Score as part of the application process.
FICO is dominant in the personal credit score marketplace. 90% of top lenders use FICO Scores when making consumer lending decisions. Yet FICO Scores are very relevant in the business credit score marketplace as well.
The FICO SBSS Score
The FICO LiquidCredit Small Business Scoring Service, also known as FICO SBSS, is a popular credit score used by lenders and financial institutions to help predict risk when businesses apply for financing. The FICO SBSS Score, with a range of 0 to 300, is a hybrid score which considers both business and personal credit together. The higher your score, the better your likelihood of making on-time payments to a business lender.
If you want to earn a decent FICO SBSS Score (and you should because lenders commonly use it), you’ll need to focus on maintaining healthy credit reports – both business and personal. On-time payment history, low credit utilization on credit cards, and lengthier credit history are all factors that could potentially improve your FICO SBSS Score. You can also check your FICO SBSS score when you select the add-on to Nav Prime.
All Business Credit Scores Matter
Lenders issuing Small Business Administration (SBA) loans will be required to check a FICO SBSS Score for certain loans. When that happens, the SBA requires a FICO SBSS Score of 160 or higher (often 165+) or a more extensive credit review will be required.
FICO SBSS is a popular credit score, used by more than 7,500 lenders around the United States. Still, it’s not the only business credit score you need to monitor.
Different commercial lenders use different credit scores. As a result, you should keep an eye on your business credit reports and other factors that can influence your many different business credit scores.
You can’t control which credit score a lender uses to review your application. You can, however, learn which factors affect your business credit scores in the first place. By understanding the factors that shape your scores, such as payment history and credit utilization, you can work toward building business credit reports which perform well under the scrutiny of multiple business credit scoring models.
Benefits of Business Credit
Good business credit can pay off in many ways. Here are five great benefits your company may be able to enjoy when you put in the effort to build your business credit.
- Qualify for financing. Although credit isn’t the only factor lenders consider, good business credit scores can improve your odds of approval the next time you fill out a business credit application.
- Save money. Good business credit can lead to lower insurance premiums, better rates and fees, and smaller deposits when you take out a new lease or service for your company. Solid business credit may also help you secure better trade terms from suppliers. The opposite is true for bad credit scores.
- Keep your personal finances and business finances separate. Separating your credit can protect your personal credit reports and simplify accounting.
- Shop for better business credit card and loan options. When your business credit is in great shape, you can likely afford to shop around for the best rates and offers different lenders have to offer.
- Increase the value of your company. If you ever hope to sell your business or attract investors in the future, a strong business credit profile can be a strong selling point.
Ready to see where your business credit stands? Use Nav to check your business and personal credit side by side.
When you first learn about business credit and how it works, it may seem like you have a long way to go. By taking steps to educate yourself about business credit, you might already be miles ahead of the competition.
This article was originally written on May 23, 2019 and updated on November 15, 2023.