Building business credit doesn’t happen overnight. You must ensure your business is registered with the correct credit agencies, create business accounts that report to business credit bureaus, and pay your bills on time. Building strong business credit can benefit your small business in many ways. With a high business credit score, getting business financing, securing business insurance, or establishing payment terms with suppliers can be less expensive. It can even help your business land corporate contracts, as often corporations require proof of financial stability and on-time payments before awarding a significant contract. Since there is no notification when your business credit is reviewed, you may never know how your credit history has affected your business.
You can establish business credit with any business structure, including LLCs and S-corporations. You may be able to establish business credit as a sole proprietor with a registered business name. However, keep in mind that without a registered legal entity, you’ll never truly be able to separate your business and personal credit. Also be aware that personal credit cards are only reported to consumer credit bureaus, not business credit bureaus. Therefore, paying your personal bills on time, while a good practice, will not help you establish business credit. Even if you use your personal credit cards to pay for business expenses, it will not help you build a business credit portfolio.
Does Your Personal Credit Matter for Your Business?
Yes, a small business owner’s personal and business credit are both important. It is common for stores or lenders to require personal credit checks for small business credit cards or loans. So, keeping your personal credit score high is a good idea. The good thing is that you can start building business credit even if your personal credit isn’t the greatest. The key to building a good business credit score is to do business with companies that report payment history. Then pay on time and keep your debt levels under control.
9 Steps to Establish Business Credit
Building business credit can be a little complex, so here are the steps to establish business credit.
- Build your foundation
- Register your business
- Get a Dun and Bradstreet number
- Get accounts that report
- Establish trade lines with your suppliers
- Pay on time
- Pay your taxes
- Keeping good credit
- Monitor your credit
1. Build Your Foundation
To effectively establish business credit, it helps to establish your business properly. If your business is new, take the time to set up your business, so it appears professional. 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 a PO Box or even your home address if you’re just starting.
2. Register Your Business
Most businesses should be officially registered with their state. You should have completed this step if you formed a business entity such as an LLC or S Corp in your state. Annual filings will likely be required. (If you started your business in another state, you might also need to register your business in the state where you do business.) You may also need to get professional or business licenses. Check your state requirements. Some commercial credit agencies may use public information such as this 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 & Bradstreet. If your business doesn’t already have one, you should request one, and 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 request with them. An EIN is the business ID number every business needs to get from the IRS. Having one is not required to establish business credit. However, you can’t open a business bank account without an EIN.
4. Establish Accounts That Report
To start building your credit, you need to establish accounts that will report to business credit bureaus. Ideally, you’ll want to hold at least two to three credit accounts with companies that report. They can be vendor accounts with an office supply store, a business credit card, or a credit-builder account. More accounts can be helpful as your business grows. When it comes to your business credit score, most small business lenders like to see a business credit score above 75. Still, local lenders such as CDFIs or Community Development Financial Institutions may consider lower scores for small businesses or startups. Conventional consumer financing companies rarely make loans to individuals with credit scores below 600.
Three of the most affordable reporting accounts are:
The benefit of doing this is to have your payment history reported to the credit bureaus and establish your business credit; if you have established business credit, these three reports will fortify what you have built up. These companies send data to the credit bureaus on the last business day of every month.
5. Establish Trade Lines with Your Suppliers
Suppliers often extend trade credit, which allows you to pay several days or weeks after you receive the inventory. This accounts-payable relationship can boost your business credit score, provided your supplier reports payments to a business credit bureau. You can set up trade lines with any small vendor, such as your water supplier, payroll company, or wholesale distributor. If those vendors don’t report to a credit bureau, you can list them as a trade reference on your account, and Dun & Bradstreet will follow up to collect your trade data.
6. Pay on Time
Payment history is the single most important factor for building business credit. You must keep accounts current and active over a period of time to demonstrate the growth and creditworthiness of the business. Pay on time or early if you can, and you may build your business credit score more quickly.
7. Pay Your Taxes
Unpaid taxes or business debt can result in a lien, granting creditors a legal right to seize your property to satisfy the debt. And outstanding debt may eventually result in a court ruling — or judgment — against your business to collect the debt. These negative marks on your business credit report can haunt you. Bankruptcies, for example, stay on your Experian credit score for 10 years; tax liens, judgments, and collections remain for almost seven years.
8. Keep Your Credit
One of the most important steps in building business credit is maintaining it once you reach the level you want. Paying bills on time or early and establishing good relationships with your suppliers, creditors and lenders are the easiest ways to maintain your business credit score. However, it’s important to remember that part of building good business credit is developing strong financial habits: saving money, paying bills timely, and making informed financial decisions about the future of your business. Creating these habits feeds into the holistic financial experience your business needs to have to establish trust and build a successful track record.
9. Monitor Your Credit
Monitoring your business credit history can alert you to problems so you can investigate further. Check your credit reports and scores with more than one major credit reporting agency to find out whether your accounts are helping your scores. If not, consider adding additional credit references. If you find an error, file a dispute with the credit bureau reporting the mistake.
New accounts may not appear on your business credit reports for a few months. Once they do, you’ll need several months of on-time payments to establish business credit and get a good 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 business credit in six months to a year. The good thing is that you can spend as little as $100 a month to build your business credit.