How to Build Good Business Credit

Finances play a significant role in the success of any business. According to a 2019 U.S. Bank study, 82 percent of companies fail due to poor cash flow management. That’s because a business needs working capital to pay its bills, expand its operations, and handle unexpected costs.

Building good business credit is one way to ensure a business has the foundation it needs to succeed financially. By understanding the ins and outs of business credit, entrepreneurs can ensure their companies are in good financial standing and can access the capital they need to grow.

What is Business Credit and How Does it Work?

Business credit is a type of alternative business financing companies use to finance their operations. It allows businesses to borrow money from lenders and repay the debt over time. Companies can also use business credit to get lines of credit, which they can use as needed and repay at a specific timeframe.

Startup companies and small businesses are often the most likely to use business credit, as they may not have the same access to capital as larger businesses. However, any company can establish business credit.

Why is Building Business Credit Important?

There are several advantages when building business credit. Good business credit can make it easier to get financing, lines of credit, and business insurance. It can also encourage favorable payment terms and lower interest rates from suppliers, landlords, and vendors. In addition, good business credit can help secure business contracts with agencies and corporations.

Business credit is also the first thing companies use to decide whether or not to do business with you. But since companies are not required to send notifications when they check your business credit, you may not always be aware of how your credit history impacts your business.

Is Business Credit the Same as Personal Credit?

Business credit is separate from personal credit; therefore, they’re not the same. That means a business owner’s personal credit scores will not affect their business credit scores. That’s another reason entrepreneurs need to establish business credit — so their personal finances don’t become intertwined with their business finances.

However, both credits can be valuable, especially for small business owners. Good personal credit history can give business owners an edge when applying for business loans. That’s because lenders often consider an owner’s creditworthiness when making loan decisions.

What’s Your Business Credit Score When You First Start?

Business credit scores range from 1 to 100. When you first start building business credit, your score will be low (or no credit score) because you don’t have a history yet. Others may start with a different score. The key is to consistently make on-time payments and keep balances low on your credit accounts to improve your score over time.

How Can I Build Business Credit Fast?

When companies report their payment history to business credit bureaus, business credit is created. The key to building good business credit is doing business with companies that report payment history, pay on time, and keep debt manageable.

There are a few other ways businesses can start building credit, such as the following:

Establish your Business

A well-established company is more likely to get approved for business credit than a startup. That’s because credit agencies want to see a company with a solid track record. By appearing professional to clients and lenders, entrepreneurs can show that their business is creditworthy.

Get a Business Phone Number and Email Address

A professional business phone number and email address are essential for building good business credit. That’s because these details show that your business is legitimate. And when companies apply for credit, lenders will often check to see if the contact information on the application matches the business’s website and other online listings.

Register your Business

Most businesses must register with the government before operating. This is usually done through the Secretary of State’s office. Registering your business shows credit agencies that your company is legitimate and has met all the necessary requirements.

You may need to file additional paperwork if you have a business entity, such as a limited liability company or corporation. For instance, you may need to file an annual report or Articles of Incorporation. On the other hand, if you operate as a sole proprietor, you’ll only need to register your business name.

Set Up a Business Bank Account

Without a business bank account, proving that your company is a separate entity from your personal finances can be challenging. A business bank account also makes it easier to track expenses and income, which can be helpful when applying for loans or lines of credit.

Keep your personal and business finances separate by only using your business account for business expenses. This way, you’ll have a clear picture of your company’s financials, and you won’t risk damaging your personal credit score.

Open a Business Credit Card

One of the easiest ways to start building business credit is to apply for a business credit card. When you have several credit card transactions that get paid on time, businesses will report that activity to the business credit reporting agencies, which will help you build good business credit report.

When you’re first starting, you may not be able to get a business credit card with a high limit. That’s why it’s essential only to charge what you can afford to pay off each month. Otherwise, you could end up with high balances that hurt your credit score.

Register for a D-U-N-S Number

D-U-N-S is a business identification number that businesses use to track their creditworthiness. It’s a Dun & Bradstreet number, and it’s free to register for one. You can get a D-U-N-S number by registering your business with the Small Business Association or contacting Dun & Bradstreet directly.

Another number to secure is an EIN, which is an Employer Identification Number. The IRS uses this number to identify businesses for tax purposes. You can apply for an EIN online, by mail, or by fax.

Get Accounts with Suppliers Reporting to Credit Bureaus

Another way to build business credit is to set up accounts with suppliers that report payment history to credit bureaus. That way, when you make payments on time, the positive activity will show up on credit reports, and your credit score will improve. These may include vendors, credit builder accounts and utility companies.

Make Timely Payments

One of the most important things businesses can do to build good business credit is to make timely payments. Late payments can damage your score when companies report payment history to credit agencies. So it’s essential to pay bills on time, every time.

Monitor Your Business Credit Score

It’s also important to keep an eye on your business credit scores. That way, you can spot any potential problems early and take steps to correct them. You can check your business credit scores for free on several websites, including Nav.com and Dun & Bradstreet.

Get a Business Loan

One of the best ways to build business credit is to get a business loan and make timely payments. Loan payments are reported to major business credit bureaus, which is a great way to improve your credit score.

Just make sure to shop around for the best rates and terms. And be sure to read the fine print before signing any loan documents. Many business loans have personal guarantees, which means you’re responsible for the debt if your business can’t pay it back.

How Long Does it Take to Build Good Business Credit?

The amount of time it takes to build good business credit depends on a few factors, including your business type and your payment history. Assuming you have a new business with no credit history, it is possible to see results in as little as six months.

Other Information You Must Know About Business Credit

How Long Before You Get Business Credit?

There’s no set time frame for how long you need to have a business to get business credit. However, it’s generally easier to build business credit if you’ve been in business for at least a year or two. That’s because lenders and suppliers are more likely to work with established companies.

What Types of Businesses Should Get Business Credit?

Any business structure can qualify for business credit, including sole proprietorships, limited liability companies, S corporations and C corporations. However, it’s important to note that without a legal business entity, you will not be able to separate your business and personal finances — and that could put your personal credit at risk.

Can a Business Checking Account Build Business Credit?

A business checking account alone will not help you build business credit. However, some banks may offer business lines of credit or loans to customers with good financial records, including a history of responsible credit use. A business bank account is also often used to assess business creditworthiness.

Is There a Minimum Amount of Business Credit Needed?

No set minimum amount of business credit is needed to qualify for loans or other financings. However, lenders will often look at your credit score and history to determine whether you’re a good candidate for a loan. The better your credit score, the more likely you are to qualify for a loan with favorable terms.

Do You Need Good Personal Credit to Get Business Credit?

You don’t need good personal credit to get business credit. However, if you’re starting from scratch, you may need a personal guarantee to qualify for some types of business financing. A personal guarantee means you’re responsible for repaying the debt if your business can’t.

Does Your Business Partner’s Credit Score Affect Your Business Credit Score?

No, your business partner’s credit scores do not directly affect your business credit score. Like your personal credit score, business credit reports are not based on other people’s financial records. However, if you’re applying for a business loan with a personal guarantee, your lender may consider your partners’ credit scores as part of their decision-making process.

What Do I Do if Other Accounts Don’t Show Up on My Business Credit Report?

Since lenders are not required to report to a business credit reporting agency, some accounts may not appear on your business credit reports. This is especially true for smaller lenders, such as local banks and credit unions.

If you have an account with a lender that doesn’t report to business credit agencies, you can try contacting the credit reporting agency directly. You may also need to dispute the information with the creditor.

How Do You Get Business Credit if You Have Bad Personal Credit?

If you have bad personal credit, you may still be able to get business credit by focusing on building a solid business credit history. That means making timely payments, monitoring your business credit file, and getting a business loan. You can also look into alternative financing options, such as merchant cash advances and invoice factoring.

Can I Build Credit Score Without Going into Debt?

You can establish business credit without debt by using supplier or vendor net-30 accounts. With these accounts, you’ll be required to pay the outstanding balance within 30 days. You can also use Nav’s Business Boost or Business Loan Builder, which includes tradeline reporting to primary business credit bureaus. Other services like eCredable Business Lift can help you file accounts your business is already paying.

How Much of Your Business Credit Should You Use?

There’s no hard and fast rule for how much business credit you should use. However, keeping your balances low is generally best — about 30% of the credit limit is a good rule of thumb. That way, you’ll avoid damaging your business credit score and incurring extra interest charges.

How Often Should I Check My Business Credit Score?

You should check your business credit file at least once a year. Monitoring your business credit line can help you identify errors and catch potential problems early. You should also check your business credit reports for accuracy when you check your business credit score. Immediate changes in your business credit rating may not be reflected on your credit report right away.

What’s Next?

Building good business credit is essential for small business owners. By taking the time to establish a strong credit history, entrepreneurs can access the financing they need to grow their businesses. And by monitoring your credit score, you can ensure that you’re always in good standing with lenders. Now that you know how to build good business credit, it’s time to start working on your business credit profile.