Building and maintaining business credit is an essential part of growing your company. A strong business credit score can help you secure better terms on business loans, get lower rates on business insurance, and negotiate more favorable terms with suppliers. Low (or no) business credit scores, on the other hand, may limit your opportunities.
Businesses don’t automatically start out with credit. There are several steps involved in establishing and building credit files with the major commercial credit bureaus. Read on for tips on how to build a strong business credit profile that can help open doors for your company.
Key Points
• Building business credit starts with choosing the right business structure and obtaining a federal tax ID number.
• Opening a business bank account and establishing credit with vendors and suppliers are crucial steps.
• Monitoring business credit reports and paying bills on time are key to maintaining a good credit score.
• There are a few different systems for evaluating business credit scores. The bureaus involved use different score ranges than those utilized for personal credit scores.
• Regularly checking credit reports for accuracy is important to correct any errors affecting the credit score.
💡 Recommended: Guide to Personal Credit vs Business Credit
What Is Business Credit?
Business credit is similar to your personal credit in that it tracks how well you’ve managed your credit and accounts. The key difference is that business credit only looks at how your company is managing its finances. A strong business credit history can help your business qualify for the best small business loans. Somewhere down the line, you may need an injection of capital for inventory, equipment, operating expenses, or expansion. Learning how to get business credit now could improve your odds of future loan approvals, as well as the rates and terms you get offered.
Primary Factors Lenders Consider
To understand how to build business credit, it helps to first examine the primary factors that creditors and lenders look at. Different credit agencies may calculate scores using their own algorithms. But in general, your business credit file includes your company’s payment history, credit utilization, the size of your business, and your credit mix.
Payment History
Like your personal credit score, your company’s payment history is one of the most important components of your business credit score. It shows you have both the cash flow and the systems in place to pay your bills on time.
Credit Utilization
Your business’s credit utilization compares your available credit to your actual amount of debt. If your business credit card is close to being maxed out, for example, your company would have a high credit utilization ratio. That can raise a red flag to lenders when you’re applying for small business financing.
The Size of the Business
The size of your business, and in particular its revenue, impacts your debt-to-income ratio. A large business with a higher amount of revenue can typically remain healthy even with a large amount of debt. Therefore, the lower the debt-to-income ratio your business has, generally, the better its credit score should be.
Credit Mix
Credit scoring agencies also weigh the types of debt your business holds, although it’s not as important for business credit scores as it is for personal credit scores. Even so, having several unsecured credit cards as your only type of debt may eventually impact your score, while an installment loan tied to an asset along with those unsecured credit cards, for example, may be viewed more favorably.
Length of Credit History and Its Impact
After you start a business, you may wonder how to get business credit and how long you’ll be waiting. For a new borrower, it’s likely to take at least three months to get a credit score. That’s because lenders and card issuers want evidence of your cash flow and fiscal discipline. Many creditors won’t extend loan offers to businesses less than six months old.
Step-by-Step Guide to Building Business Credit
Because your company’s growth is bound to require funding sooner or later, it’s worthwhile to learn how to build company credit as promptly as you can.
1. Establish Your Business as a Legal Entity
Before you start building your business credit, you’ll need to legally register it as a business entity. You can begin by choosing your incorporation type, such as LLC, S-corp, or C-corp. (If your business is very small, you may be inclined to stay a sole proprietor, but there are some LLC tax benefits to consider.)
Once you’ve decided, you then register with the appropriate state and local agencies. Requirements vary depending on where you live or where you are registering the business.
You’ll also need to register with the federal government by getting a federal tax identification number, as it’s required for most types of businesses. This is sometimes referred to as an employer identification number (EIN). If you’re weighing sole proprietorship vs. LLC status, note that sole proprietors need not register for an EIN; they can use their Social Security number as a tax ID for the business.
2. Open a Business Bank Account
Opening a business bank account is helpful in order to send and track payments to vendors and creditors. Consider getting accounts for both checking and savings. It might be a good time to ask your banker how to build company credit.
3. Register with Business Credit Bureaus
The three credit bureaus that track businesses and calculate their credit scores are Equifax®, Experian®, and Dun & Bradstreet®. Only Dun & Bradstreet® requires a business to actively register in order to build a credit profile. The other two automatically collect financial data when you set up credit lines with participating creditors. (You can find details about each of the bureaus later in this story.)
4. Establish Credit Lines with Vendors and Suppliers
Vendor credit and supplier credit are types of short-term financing for specific products or services. You typically receive the goods or services up front and then pay your bill by the designated due date. Typically, you have 30 days to make a payment.
Using vendor credit often appears on your business credit report, so it may be practical to choose suppliers that report your account to the appropriate agencies. Having timely payments on record can help you boost your business credit score.
Vendor credits are typically net-30 accounts, meaning you have 30 days to make a payment. If you’re new to doing business with the vendor, you may need to make a deposit or purchase something upfront.
5. Apply for a Business Credit Card
Opening a business credit card can help build your business credit, but as with suppliers, you’ll likely want to first make sure the credit card company reports to the major commercial credit agencies.
Even if your company doesn’t need the available credit, getting a card is a way to build a positive payment history. You simply make a small charge each month and pay the balance in full by the due date. Keeping your balances in check and paying off the card completely each month can help you strengthen your business credit profile.
6. Pay All Bills on Time or Early
Business credit works very similarly to your personal credit: On-time payments help improve your credit profile, while late payments can negatively impact your scores. And as with individuals, credit bureaus monitor all the accounts (known in business as credit tradelines) used by your company. That information plays a big role in determining your business credit score. So, as always, it’s wise to pay all your bills on time — or even early if you can.
7. Monitor Your Business Credit Reports
Regularly monitor your business credit reports to keep an eye on any errors that may be affecting the overall score. If an error or inaccuracy pops up on the record, follow the appropriate procedures for reporting it in order to have the issue corrected.
Establishing a File With the Major Credit Reporting Agencies
Whether you’re a new or established business, it’s important to know how to open a business credit file. While your personal credit history grows as creditors independently report your credit lines and payments, business credit works a little differently.
There are three separate business credit reporting agencies, and only two of them automatically begin collecting financial data when you establish credit with participating creditors. However, not all vendors and creditors report to the credit agencies. If you’re set on building your business credit report, you can ask your creditors if they submit payment history and to which agencies. Here’s how each agency works so you can start building your commercial credit.
Equifax®
Equifax’s business credit operations act similarly to its personal credit process. Once you establish your business and bank account, you may automatically begin accruing a history as you tap into credit opportunities, as long as the vendor or creditor reports to Equifax.
Equifax’s Business Credit Reports offer two scores — Business Credit Risk Score and Business Failure Score. The Business Credit Risk Score is on a scale of 101 to 992, with a higher score indicating a lower risk of a “business incurring a 90 days severe delinquency or charge-off over the next 12 months.” Business Failure Score aims to estimate the likelihood a business might fail over the next year. Scores for this metric range from 1000 to 1722, with higher scores indicating a lower risk.
You must pay a fee in order to access your company’s business credit file, which costs $99.95 from Equifax.
Experian®
Experian also tracks business credit history, and you can check to see if your company has an established report by using the BizVerify service. Experian’s small business credit scores run on a scale of 1 to 100. A higher score indicates a lower risk. You can purchase your full credit report for $49.95 and up to see the financial background potential creditors may see.
Dun & Bradstreet®
Unlike Equifax and Experian, you must actually register with Dun & Bradstreet in order to build a credit profile for your company there. Once registered, you’ll receive a unique D-U-N-S Number assigned to your business. In some cases, you may need to sign up for this identifier before applying for credit with certain lenders, for example if you are applying for a grant or SBA loan. Dun & Bradstreet’s credit scoring also runs on a scale of 1 to 100. Scores of 80 or higher are generally considered low risk.
Recommended: Guide to Typical Small Business Loan Requirements
The Takeaway
Building positive business credit doesn’t happen overnight, but it can help you access more competitive financing opportunities and build credibility. Important steps can include properly registering your company and understanding what type of accounts impact your credit score. Be sure to open your accounts under your business name. And remember that getting credit only helps your score if it is well managed. That includes keeping your balances as low as possible and making your payments on time.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What’s the fastest way to build business credit?
Key steps to building business credit involve choosing the right business structure, obtaining a Federal tax ID number, opening a business bank account, establishing credit with vendors and suppliers, and monitoring your business credit reports. Paying bills promptly and watching your debt-to-income and credit utilization ratios can also help.
Is building business credit worth it?
Building business credit can be worthwhile. It can help develop trust with vendors and suppliers, qualify you for competitive rates and terms on funding, and establish your credibility as an enterprise.
What credit score does an LLC start with?
A new LLC won’t start with any credit score. You need to access and use credit, establishing a payment history, over several months to get an initial credit score.
How long does it take to establish business credit?
For a new borrower, it could take at least three months to get a credit score; achieving a good or excellent score will probably take longer. Many creditors won’t extend loan offers to businesses less than six months old.
Can you build business credit without a personal guarantee?
Some credit card issuers will offer business cards with no personal guarantee. But your options are comparatively few, and you’ll probably have to fulfill certain requirements, such as revenue levels and a minimum number of years in business.
Photo credit: iStock/LaylaBird
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