How to Build Business Credit

Whether you’re launching a startup or already managing a small business, understanding how to build business credit is a crucial aspect of your company's financial health. A robust business credit profile can open doors to various financing options, better loan terms, and advantageous relationships with suppliers. This comprehensive guide will walk you through the process of building business credit.

Understanding Business Credit

Before diving into the process of building business credit, it's essential to grasp what it is. Business credit is similar to personal credit in that it represents your company’s creditworthiness to potential lenders and suppliers. Just like your personal credit score, your business credit score can affect your ability to secure loans, the interest rates you're offered, and even the terms your business gets from suppliers. And speaking of personal credit, your business credit should be treated with the same seriousness and attention. Neglecting your business credit—or even ignoring the fact that you have business credit—can have a very negative impact on your ability to grow your business.

Step 1: Establish Your Business

Building business credit begins with formally establishing your business. To be seen as a separate entity from you, the business owner, your company needs to be a legal entity. This legal separation protects your personal assets from business liabilities and enables your business to start building its own credit history.

Next, obtain a free Employer Identification Number (EIN) from the IRS. This number is essentially a social security number for your business and is required to file tax returns, open business bank accounts and establish credit.

Step 2: Register with Business Credit Bureaus

Business credit scores are maintained by credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business. Consider getting a D-U-N-S number from Dun & Bradstreet, a unique identifier for your business that is often required to build a business credit file. You can think of these like the personal credit score bureaus, Experian, Equifax and Transunion. Essentially, they operate in similar ways, reporting good payments, late payments and applications for business loans. In addition, business credit bureaus report financing from investors.

Step 3: Open a Business Bank Account

Open a business checking account in your registered business name. Having a separate account for your business not only keeps your accounting clean but also provides another proof point to lenders that your business is a separate entity. To shore up your business and ensure financial security, take this one step further and open up a business savings account at the same time. Note that your business bank may ask to see documentation, such as your Articles of Incorporation.

Step 4: Get a Business Credit Card or Line of Credit

Obtain a business credit card from a company that reports to the major credit bureaus. Alternatively, open a business line of credit. These actions provide opportunities to build a credit history for your business. You may not qualify right out of the gate for a business credit card or line of credit. Like with personal credit, you need credit to get credit. However, there are some places that will approve your business for a small credit card and increase the credit line when you make timely payments. Just be sure not to get too far over your head in business debt. Treat it like short term debt, to be paid off in full each month.

Step 5: Establish Trade Lines with Suppliers and Vendors

You can also ask one or more of your vendors if they’ll give you a line of credit. Strive to work with specific suppliers and vendors that offer trade credit — that is, the option to pay several days or weeks after receiving goods or services. Be sure to request that these suppliers report your payments to business credit bureaus, as not all vendors and suppliers do this automatically. Vendors must do a minimum volume of business to be eligible to report to credit bureaus. Even if they can’t report, they can act as a reference should you need or want lines of credit from other vendors you do business with. Having several trade lines in good standing can improve your business credit score.

Step 6: Pay Your Bills on Time

Just like with personal credit, timely payments are critical for maintaining good business credit. In fact, payment history is often the most significant factor in your business credit score. Always aim to pay your bills before their due date to reduce the amount of interest due.

Step 7: Monitor Your Business Credit Report

Regularly reviewing your business credit report allows you to catch any errors or signs of fraudulent activity. Most credit bureaus offer services that allow you to check your business credit score and monitor changes. Dispute any inaccuracies you find as they can harm your credit.

Step 8: Borrow Responsibly

As you begin to establish credit, it can be tempting to take on more debt than necessary. However, overextending your business can lead to missed payments and damage your credit score. Borrow only what you need, and always have a plan for repayment.

Step 9: Maintain Your Information

As your business grows and evolves, ensure that all business information on file with banks, lenders, and credit bureaus is up-to-date. This includes contact information, size of your business, and number of employees. Regular updates ensure your credit profile accurately represents your business.

Step 10: Diversify Your Credit

Over time, try to establish a mix of credit types — such as trade credit, business credit cards, and traditional loans. Credit mix often factors into your credit score, and a diverse portfolio demonstrates to lenders that you can manage different types of credit responsibly.

Building business credit isn't an overnight task, but with consistency, diligence, and strategic planning, you can establish a strong credit profile that benefits your business. Contact your CPA for more tips for building and managing business credit effectively.