How to Build Business Credit: Why It’s Important and What to Do

How to Build Business Credit: Why It’s Important and What to Do

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Some small business owners don’t realize their business can have its own credit profile. In fact, your business may have its own credit history and credit scores, which are created with specific business credit-scoring models.

Business credit is similar to — but completely separate from — your personal credit. Knowing how to build business credit can help your business qualify for better financing and pay less for insurance, and it may be important if you’re trying to attract new clients or negotiate with vendors.

Why is business credit important?

Business credit is important because it can impact how other organizations work with your business. It can directly influence:

  • The business’s ability to qualify for financing
  • Rates and terms on loans, lines of credit and leases
  • How long vendors will give you to pay on terms
  • Business insurance premiums
  • Whether clients want to work with the business

“Business credit is helpful when the business needs substantial capital,” said Bill Heestand, a small business mentor and author of “The Ownership Ladder: How a Smart Employee Can Buy Out the Boss.” Heestand added, “The larger a business scales, the more capital might be required.”

Building your business’s credit can also help you separate your personal and business finances, which can limit the owner’s personal liability. However, for many small businesses, the owner’s (or owners’) personal credit can still be important. “For that reason, the owner needs access to credit both personally and as an officer of the entity,” Heestand said.

How does business credit work?

There are three main business credit bureaus:

  • Dun & Bradstreet
  • Equifax
  • Experian

The bureaus collect and organize data about businesses and create business credit reports. A credit-scoring model can then analyze data to determine a business’s credit score.

As with your personal credit, there are different types of business credit scores. Dun & Bradstreet, Equifax, Experian and FICO create widely-used business credit scores with different:

  • Ranges
  • Scoring factors
  • Purposes

When your business applies for a loan or business insurance, signs a new contract or requests terms from a vendor, the other company can check your business’s credit history and credit score. Unlike with personal credit, anyone can check your business’s credit report anytime. They don’t need a reason or your permission.

If your business has a good track record and high credit scores, you may find it’s easier (and cheaper) to qualify for financing, products, services or trade contracts.

How to build business credit: 6 steps

There are basic steps every small business will need to take before it can build business credit and qualify for its own business credit scores. Here’s more on how to build business credit.

Step 1: Form a business entity

If you haven’t already, you’ll need to incorporate your business (C corporation or S corporation) or register as a limited liability company (LLC). You can run a business as a sole proprietor, but you won’t be able to build separate business credit because there’s no legal separation between the business and the owner.

As part of the incorporation or registration process, you’ll also apply for an Employer Identification Number (EIN). The EIN can act as an identifier for the business — similar to how Social Security numbers can identify individuals — and help connect your business to its credit accounts.

Step 2: Open business bank accounts and phone lines

Once you’ve established the business, your next step is to open business bank accounts in the business’s name. You’ll likely need these accounts even if you’re not intent on establishing business credit.

However, depending on the type of business you run, a step you might not otherwise take is to open a dedicated business phone line. You’ll also want to make sure it’s listed in public directories. If you don’t want to spring for a dedicated landline, you may be able to opt for a less expensive Voice over Internet Protocol (VoIP) line.

Step 3: Register for a DUNS Number

Dun & Bradstreet requires you to also register for a free DUNS Number, another identifier that will link your business to accounts in the Dun & Bradstreet credit system.

You don’t need a DUNS Number to build business credit with the other business bureaus. But you may want to register for one since it’s free, and because Dun & Bradstreet is a commonly-checked source. Dun & Bradstreet also created the Paydex Score, a widely-used business credit score that ranges from 0 to 100.

Step 4: Open accounts that will be reported to business credit bureaus

Once your business is able to become part of the business credit-reporting system, you’ll need to take steps to build credit. To do this, you’ll need to open accounts with companies that will report the account and your payments to the business credit bureaus. Often, these are:

“As you build, you can ask your banker for a small loan and use that cash for credit-building purposes,” Heestand said. You’ll likely need a personal guarantee, he said, but your business will begin to create a credit record.

If you’re working with a company that doesn’t, you could ask them to start reporting to the credit bureaus. But companies aren’t required to report.

Alternatively, you may need to open new credit lines or accounts with companies that you know will report the account. You can ask before opening if you’re unsure. Dun & Bradstreet lets you submit trade references, and the bureau will then reach out to the other party for verification.

Step 5: Pay your bills on time

Many factors can influence your business’s credit scores. To build good business credit, one of the most important things to do is pay all your bills on time.

To get the highest Paydex Score (100), you need to pay invoices an average of 30 days ahead of their due date. You may also want to focus on paying larger invoices first, as the score considers the timeliness of your payments and how much you owe.

Some factors may also be out of your control, such as your business’s time in business, industry and business size. Focus on the factors you can control:

  • Paying bills
  • Opening new accounts that will be reported
  • Minimizing your use of revolving credit
  • Having positive payment trends over time

Step 6: Monitor your business credit

Once you’re set up, you may want to monitor your business’s credit for errors.

An error could be hurting your business's creditworthiness and costing you money. It may also be a sign of fraud. Early detection can help you fix the error before it does too much harm, and keep fraudsters from taking out loans in your business’s name. If you find an error, you can file a dispute with the credit bureau to get the incorrect information deleted or corrected.

Business credit bureaus don’t need to give you free access to your business credit reports, but you may be able to find free options to pay for your reports (which often come with scores).

Using your business credit

Once you’ve built your business credit, you can use it to find better financing. However, even when it’s an option, don’t assume using your business credit is the best way to finance every small business move.

“For example, the rates charged, or the underwriting requirements of commercial lenders, might be less favorable than capital the owner can leverage from personal assets,” Heestand said. You may be taking more risk if you borrow against personal assets, but that might be the case with a business loan if you have to sign a personal guarantee anyway.

“What an owner needs to keep in mind is the impact on the balance sheet from debt incurred [by their business entity],” Heestand said. “And if your balance sheet is required for trade receivables, you may not wish to incur much debt from traditional sources.”

But even if you never plan on borrowing money, building business credit can benefit your business in other ways. It may qualify you for less expensive insurance, and you may be able to negotiate better terms with your vendors or suppliers, freeing up cash to use in other parts of your business.  

Louis is a personal finance writer who works with Fortune 500 financial services firms, FinTech startups, and non-profits to help promote financial literacy. He covers a variety of personal finance topics and especially likes writing about credit and loans.