How to Establish Business Credit: 8 Steps to Building Business Credit

Establishing business credit is important for an entrepreneur. But do you know what the term “business credit” means and how you can establish yours? Here’s information you need to know about this important element when running a small business.

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What is business credit?

Business credit is simply a company’s ability to buy now and pay later. It’s the ability of a business to qualify for financing. You know about your personal credit score, but businesses also have credit reports and scores.

Credit reporting agencies keep records of debt payments and other credit information on businesses. Business credit reports can be used by lenders, creditors, suppliers, insurance companies, and other organizations evaluating a credit or insurance application or business deal. When a business issues another business credit, it's referred to as “trade credit”. Trade, or business credit, is the single largest source of lending in the world.

How can I check my business credit?

Anyone can go to one of the reporting agencies and look up your business's score. Some agencies offer the report for free but some may charge. Three of the major business credit reporting are Dun & Bradstreet, Equifax Business, and Experian Business.

What is personal credit?

Once you accept your first job or apply for a credit card, a personal credit profile is started with the credit reporting agencies - Equifax, Experian and TransUnion. Eventually, this report becomes an indicator of your ability to pay back a debt.

Information on your personal credit report includes:

  • Total number of credit accounts you have open, including mortgages, credit cards, automobile loans and other accounts
  • Amount you owe on each account, and the monthly payments you must make on each
  • Accounts that are properly paid
  • "Delinquent" accounts (payments are past due)
  • "Derogatory" accounts (those which negatively impact your credit score)
  • Accounts that have been closed

Personal credit scores range from 300 to 850 with a score of 680 or high considered excellent, though each reporting agency uses its own proprietary algorithm to calculate a personal credit score so your score may vary somewhat with each of these agencies.

Why is my business credit score important?

If you’re just launching your business, you have tons of details to address. You might wonder if you even need to pay attention to your credit score. However, having a business credit score is necessary to run a successful business and impacts your growth and success.

Your business credit score impacts:

  • Securing a lease
  • Insurance policies
  • Financing options
  • Protection of your personal credit
  • Favorable payment terms for your supplies, showing that you pay your bills on time

Build your business credit score from the start of your business to open up financially friendly options.

How does business credit work?

Business credit scores typically range from 1 to 100. A high score suggests that your business is creditworthy and likely to pay back a debt on time. Business credit score calculation varies slightly from bureau to bureau and is influenced by components like:

  • Credit: Length of credit history, credit utilization, credit mix, payment history, balances, and trends
  • Demographic details: Business size, years in business, and industry risk
  • Public records: Amounts and frequency associated with bankruptcies, judgments, and liens

Paying on time, mixing types of credit used and not maxing out your credit limit all help build a positive business credit history. Missed payments, outstanding balances, and judgments against you can all lower your credit score. (A judgment is a decision by a court entered into the public record)

How do I establish business credit?

Here are steps you should take to establish your business credit once you’re open for business.

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Apply for a business credit card

Business cards typically carry credit limits of $50,000 or more. This makes it much easier to purchase high dollar goods and services that you need to run your business efficiently. Using a business credit card responsibly can boost your credit rating. Note that a business credit card stands alone. Your personal credit rating is not impacted by your business transactions. A business credit card also helps you control employee spending and track business expenses. Bonus: Many business credit cards have great perks.

Work with vendors that report payments and pay them early

Vendor accounts that report to business credit reporting agencies will help your business build business credit. A vendor can be any business – look into where you get your office supplies, inventory, and other outside products or services.

Incorporate

It makes it easier to create a business credit file when you form a separate legal entity for your company like an LLC or corporation. This move also makes it easier to qualify for business financing and may also provide tax advantages and can protect you from personal liability you might have as a sole proprietor.

Separate business and personal expenses

They always say don’t mix business with pleasure and in this case business owners should avoid mixing their personal and business finances. This is something you should be doing from the get-go. If you haven’t already, make clear definitions between your personal and business finances with separate accounts, this will give you a better vision on what you are spending and where.

Get an employer identification number (EIN)

If bringing on employees, you need to register for an employer identification number (EIN). An EIN is a nine-digit number assigned by the IRS used to identify the tax accounts of employers (and certain others who have no employees). The IRS uses the number to identify taxpayers who are required to file various business tax returns. Apply for an EIN on the IRS website.

Open a business banking account

According to the SBA, as soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers. You can open a business bank account once you've gotten your federal EIN.

Establish a business address and phone number

It’s important to establish your business with an address and phone number. Here are guidelines:

How to Get a Physical Address for Your Business

  • Get a P.O. Box from the United States Postal Service
  • Get a Mailbox Through the UPS Store
  • Use the Address of a Coworking Space
  • Get a Virtual Business Address

Keep business information current with the bureaus

Each business credit bureau collects different information and has unique scoring models. Different suppliers and different lenders report different kinds of data. Because a lender or supplier could pull your business credit report from any or all of the main bureaus, it’s important that you are maintaining all three.

You are allowed to update basic information about your business like employee number and years of business. A complete profile is the best practice to keep information current.

Additional resources

SmartBiz Loans helps small business owners secure funds to help their business strengthen and grow. Our blog has a wealth of information about credit scores, how to build yours, and the history you need to get the lowest cost funds available. Here are additional articles about business credit and personal credit.

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