Want to know how to build business credit to access better financing options for your small business? This article is definitely for you.

As you may have probably discovered, a strong business credit profile can open doors to any number of untapped business opportunities. A high business credit score can help you attract customers, secure investors, lease equipment, get access to affordable small business loans and much more. However, getting denied for financing because of your business credit score is frustrating and disheartening.

It can even be detrimental to your business’ future. As a business owner, you might not know anything about your company’s business credit rating and things like why this is important, what your rating is, or how to establish and build business credit.

A strong business credit profile does not just help you secure a loan, it is also important for attracting new business. And unlike with personal credit reports, anyone, including potential customers, partners, and suppliers, can have a look at your business credit report.

In this post, we will share with you insight on how to build business credit so that you can get your hands on the business funding you need.

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A Brief Description of Business Credit

If you ever thought about starting a business, or you are currently a start-up, own an existing business, or invest in real estate, then you have probably heard about “business credit”.

But what exactly is business credit? Business credit demonstrates the ability of a company to obtain or get borrowed money that can be used to purchase products or services which is based on the trust that payment will be made in the future.

Exactly as your personal credit illustrates your reliability as a borrower, your business credit conveys whether your business is a trustworthy borrower.

You can have business credit from a credit grantor, whom you agree to pay back the amount that you spent plus any additional interest charges or fees, at an agreed-upon time frame.

Building Business Credit – How It Works

As you go through various financial activities through your business, such as opening a bank account, getting a business credit card, paying suppliers, etc. This information becomes part of your business credit history and is reported to credit bureaus that deal specifically with businesses.

The three main business credit reporting agencies are Dun & Bradstreet (D&B), Experian and Equifax. Each company gathers data and information from the vendors and creditors you do business with, as well as from legal filings and public records. And then using a credit reporting algorithm, they establish your business credit in the form of a numerical value – your business credit score.

Unlike a personal credit score, however, which is determined based on a standard evaluation method, your business credit score will vary based on the credit bureau as each agency has its own method for calculating your score. This being said, however, your business credit score will typically range from 1 to 100 with a higher score indicating that your business is creditworthy, meaning you are likely to repay your bank loan or bill on time.

Additionally, although each credit bureau has its own evaluation process, generally your business credit score will be influenced by factors such as:

  • Credit: This includes the length of credit history, credit utilization, credit mix, payment history, balances, and trends.
  • Demographic details: This includes business size, years in business and industry risk.
  • Public records: This includes amounts and frequency associated with bankruptcies, judgments, and liens.

As you are trying to build business credit, especially when you have just started your company and are trying to build new business credit, actions like paying on time, mixing the types of credit you use, and not optimizing your credit limit, will all benefit your business credit history and therefore, business credit score. On the other hand, actions such as missed payments, balances outstanding and current judgments can all lower your business credit score.

Importance of Building Business Credit

If you own a small business, then you might be wondering if it is worth investing in business credit at all. Although you technically could get by with just your personal credit, it is really not the best practice for small business owners.

Let us read more about the main reasons why building business credit is important

(a) Getting Small Business Financing

One of the main reasons why it is so important to build business credit is because your business credit score is a key factor in a lender’s decision to work with you. Lenders are likely to extend a loan or line of credit to your company only if they see that your business has a good track record of paying your accounts on time and in full.

Additionally, if you want to work with the best lenders, it is even more significant to have established good business credit. Moreover, when you apply for financing, not only will a lender use your business credit history to determine whether or not to work with you, but they will also use it to determine how much money you qualify for.

In fact, according to the SBA businesses have 10 to 100 times greater credit capacity compared to personal credit.” Plus, your business credit score will also factor into what kind of interest rates you receive on your financing.

For example, if you are applying to the SBA’s 7(a) loan program (and SBA loans arguably offer the best interest rates on the market), the SBA will look at one of your business credit scores, your FICO SBSS score, to pre-qualify you for the loan. If your score is 140 or below, you will not pass their pre-screen process. Therefore, building business credit is significant for you to be able to get business financing and the best possible financing.

Even if you are not looking for financing in the immediate future, it is nevertheless important to establish business credit. If you neglect your business credit, a low score can limit your lending options if you ever do need funding.

(b) Supporting Relationships with Suppliers and Vendors

It is very likely that you will need to work with various suppliers and vendors to run your business. Generally, suppliers will offer trade credit, the ability to buy now and pay later, to businesses when they are purchasing inventory, material, equipment, etc.

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However, in the same way, that lenders prefer to work with businesses who have good business credit, suppliers are more likely to offer you trade credit if you have a track record of paying bills on time.

One of the benefits of business credit, that’s why is the ability to receive trade credit and get agreeable repayment terms. This being said, not only can trade credit help your business with cash flow, but it can actually help you build and maintain business credit as well. If the companies work with report trade information to the major and primary credit bureaus, regularly repaying them on-time or early will help improve your score.

(c) Protecting Your Personal Credit

Knowing how to build business credit, and of course, actually taking the steps to do so, is important because it will help you protect your personal credit. If you have poor business credit, you will likely need to use your personal credit to secure financing.

Although this might be a necessary means to an end during the early stages of your business, it is never the ideal approach. One of the first things any business owner should do is separating their business and personal finances and therefore, credit. Maxing out your personal credit cards to fund your business can irreparably damage your personal credit scores, meaning if your business fails, you are left with poor personal credit, making recovery difficult.

Building business credit and when you are just starting your business, building new business credit is essential for the progression, growth, and stability of your company. Also, although the thought of selling your company may be the furthest thing from your mind, your business credit history will influence this process, too. The credit score of your business is fully transferable and therefore, if you sell the company, the new owner(s) will benefit from the work you put in.

The 10 Best Ways To Build Business Credit Quickly

By now, you should have a clear idea of how business credit works. Early in the life of your company, you will want to focus your time and attention on building business credit.

Although it takes time to get business credit, by regulating your business’ credit history, you will start to understand it more and see how, over time, different actions affect your credit rating. So, if you are wondering how to build business credit and fast, there are some tried-and true-methods you can use.

Thus, all of the following 10 steps mentioned below on how to build business credit can impact your business credit history and hopefully, for the better.

1.Register Your Business

Your business credit history is separate from your personal credit history. So, the first step to start building business credit is to actually keep your business and personal finances and separate. In order to separate these finances, then, you will need to set up a registered business entity.

Unincorporated business entities, a general partnership or sole proprietorship, are the easiest to work with in terms of starting up and managing paperwork. But with these structures, there is no legal or financial separation between the owner and the business.

In this case, when you choose to work with a vendor or apply for a loan, you will have to provide your personal social security number (SSN). Resulting, your activity on your business accounts will be reflected on your personal credit report.

If you want to establish business credit, then you will want to choose one of the following structures:

  • C-corporation: A C-corporation accommodates you and your business legal and financial separation. Corporations are considered separate legal cities and a C-corporation is ideal for a business that is planning to issue stock or go public in the future.
  • S-corporation: S-corps are pass-through entities in which business’ profits are only taxed at the individual level. S-corps are also considered separate legal entities.
  • Limited liability company (LLC): An LLC is another type of business entity with liability protection and financial separation between you and your business. An LLC is easy to maintain than a corporation and grants more tax flexibility.
  • Limited liability partnership (LLP): An LLP is a registered business entity that is popular among professional industries, such as lawyers and doctors.

Although it is important to keep your ability to build business credit in mind while making your decision on how to structure your business, it is not the only factor you should consider. If you are unsure exactly how to choose the best types of business entities, you can consult a business attorney with our guide on how to pick or choose a business attorney in 5 steps or an accountant for help.

2. Apply for Employee Identification Number (EIN)

You will need to obtain an employer identification number (EIN) or tax id number, which is also known as a federal tax identification number (FIN). Once you have done this, you can open a business checking account with best places in your company’s name using the registered EIN number. The IRS uses an employer identification number (EIN) to track businesses for tax purposes.

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Just like your social security number serves as your identification number for personal taxes, your EIN serves the same purpose for your business. Generally, sole proprietorships, partnerships and single-owner LLCs can just use the owner’s social security number for tax purposes (as long as they do not have any employees).

Most various types of businesses, though, need an EIN. If you have an EIN which is known as the tax or employee identification numbers, then your business credit will be tied to this number and you can use this history to qualify for credit products and business financing.

This being said, even if you are not required to, it is a good idea to get an EIN anyway. One of the biggest benefits of an EIN is that it can assist you on how to build business credit quickly in the best ways. Plus, an EIN is free and easy to apply for on the IRS’ website.

3. Open A Business Account

Furthermore, choosing your business entity, opening a business bank account is a crucial step to drawing a line between business and personal expenses. By opening a business banking account, business credit bureaus will easily be able to see what money you are taking out of and putting into your business and will report that information on your business credit report.

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Therefore, once you have an EIN, you will want to explore your options and open the business checking account with the best that is best for your company. After you open your business account, of course, it is important to actually use it.

You should have to only use this bank account to pay for business expenses and expenditures, everything from utilities and rent to your business cell phone.  And as long as you pay them these purchases in full and on time, every time, it can also contribute to building business credit.

All in all, opening a business banking account will not only provide a bank reference for the three credit reporting agencies, but it will also open doors for better credit accounts in the future. The best small business lenders look for borrowers with business bank accounts that have been established for at least a couple of years.

4. Obtain an Address and Phone Number for Your Business

Having and obtaining a dedicated business address and phone number will solidify your business’s separate existence. Having this is a small, but important step towards building business credit because it will allow you to register with business directories.

For example, directories like the Better Business Bureau, YP.com and Angie’s List require businesses to have an address and phone number to sign up. Business credit reporting agencies seek data and information from these directories, so it is important to have correct and consistent contact information listed on all of the popular directories.

At the time you set up a dedicated phone line for your small and micro business, then you are establishing your first, simple trade credit relationship with the phone company. This history gets reported to credit agencies and will help you establish business credit.

5. Register a Data Universal Number System (DUNS) Number

If you want to build business credit, it is a good idea to open a credit file with Dun & Bradstreet. To do that, you will need to register for a DUNS, a Data Universal Number System. The DUNS system is a numerical identification process for business entities. When you apply for one, you will receive a unique nine-digit code. The process is completely free and can be completed on the Dun & Bradstreet website, but it takes up to 30 days to receive your DUNS number.

Having a DUNS is not a requirement for businesses unless you are applying for a federal government contract, grant, or SBA loan and it is not a system that is managed by the government. Nevertheless, everyone from national to international suppliers and lenders uses Dun & Bradstreet’s business credit scores. So, if you are trying to build new business credit for your start-up, applying for a DUNS is a good idea.

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6. Establish Trade Lines With Your Suppliers and Vendors

If you are purchasing supplies, ingredients or other materials from third-party vendors, those purchases could help to create and build your business credit. Many suppliers expand trade credit, which means they allow you to pay several days or weeks after you receive the inventory.

If you are having this type of accounts-payable relationship, ask your supplier to report your payments to a business credit bureau. More importantly, your business credit score will get a boost as long as you stick to the terms of the trade agreement.

You have a requirement of at least three trade lines to get a Dun & Bradstreet Paydex score, which measures past payment history. And even if you don’t work with a lot of suppliers, Colley suggests setting up trade lines with any small vendor, such as your water or office supplies distributor.

If those vendors who don’t report to a credit bureau, you can list them as a trade reference on your account, and Dun & Bradstreet will follow up to collect your trade data.

The key is to choose suppliers, who will report your payments to business credit bureaus. Not all vendors do this, and if your supplier does not report to the business credit agencies, then your on-time (or early) payments will not help you build business credit.

It is worth noting, therefore, that the popular suppliers Uline, Quill, and Grainger all report to business credit bureaus. As long as you pay on time and in full with these suppliers, you will be able to boost your business credit score.

7. Apply for a Business Credit Card

Many start-ups and small businesses use loans and credit lines to finance the operation and growth of their business. Not only is this type of credit crucial for keeping a business running smoothly, but using it will also help with establishing and building business credit.

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You might consider applying for a business credit card to cover day-to-day purchases for your business. Using a business credit card will also help solidify the separation between your personal and business finances, further building business credit.

A business line of credit works in much the same way as a credit card, minus the physical card. Instead, the funds live in your business bank account and you can withdraw money on an as-needed basis.

You then pay back what you borrow to reset your balance. Ultimately, the act of borrowing and repaying funds on a business credit card or line of credit will help build business credit, given that you are paying on time (or early, if possible) and in full.

If you are just starting out or have poor personal credit and are having a hard time qualifying for regular business credit cards, you can try to apply for and use secured business credit cards.

A secured business credit card is secured by a funds deposit that you make against your card. Moreover, if you require equipment but do not have access to the necessary cash or qualify for a loan, you might consider the benefits of leasing. Not only does this allow you to obtain and get the equipment you need to grow your business, but it also helps to establish business credit.

8. Borrow from Lenders Who Report to Business Credit Bureaus

Small-business loans can actually boost up and encourage your business credit if you make all your payments on time and the lender reports to a business credit bureau. But not all lenders do. So if you are intent on building business credit, ask the lender whether they report before you take out a small-business loan.

Banks typically report to credit bureaus, but if you have bad credit, you probably will not qualify for a bank loan. Many online small-business lenders or business owners, which are more willing to lend to bad-credit borrowers, also report, including OnDeck, Lending Club, Funding Circle, Foundation, Kabbage, and BlueVine.

However, lenders including SmartBiz, Lighter Capital, Fundbox and merchant cash advance companies do not report. If you are repaying your credit cards and loans on time and in full, you can be proud of your stellar payment history. However, you will want to be sure that you are actually getting recognized for this good behavior and building business credit from your success.

Some online lenders, however, do not file reports to business credit bureaus. To ensure that you build business credit from a loan, then, you will want to check into a lender’s policy before you apply.

9. Maintain Your Business Updates with Credit Bureaus

There are various credit bureaus that collect data and create business credit scores, including Dun & Bradstreet, Experian, and Equifax. And compared with personal credit scores, which follow the standards set by Fair Isaac Corp. to produce and generate a standard FICO score, business credit scores are much less streamlined.

Each business credit bureau has a different and unique formula for calculating scores and different lenders report different types of data. Since you never know which credit bureau your vendors, creditors or potential customers will check, it is wise to maintain all three. Dun & Bradstreet, for example, allows business owners to update basic business information (such as years in operation or number of employees) and upload financial statements.

These bureaus let you update basic information about your business (like the number of employees or years in business) and upload financial documents. The more complete your profile is at each of the business credit reporting bureaus, the better.

Additionally, it is important to review your credit reports from each of the different bureaus, not only to see your current status but also to ensure that there are not any errors affecting your business credit score. Even the smallest error can make a considerable impact on your business credit in a huge way.

10. Always Pay Your Credits, Bills, and Loans on Time

Although each credit bureau makes use of slightly different methods of crunching business credit scores, all of them consider your history of paying creditors.

To ensure a good score, make sure your repayments are done on time or, even better, early. Dun & Bradstreet only assigns and gives perfect scores to those who pay early. A long credit history tends to weigh favorably, so the sooner you can start establishing business credit, the better.

Also, credit utilization is one of the aspects of business credit scores, as it is with personal credit scores. So use your cards and lines of credit, but do not max them out.

Also, limit your spending to 20% to 30% of your credit limit. When you are thinking about how to build business credit, your mantra should be exactly the same as it is with building personal credit, that is, borrow responsibly. With steady, responsible borrowing habits, drawing from a mix of business credit accounts and paying those accounts on time and in full, you will see your business credit score improve.

Your business credit can also suffer if you have too much debt, so you do not want to take on more than you can handle. After all, you never want to make a late payment as this is a huge factor in calculating your business credit score.

Therefore, if you are struggling with cash flow or having trouble paying your bills as a result of too much debt, you will want to consider options like refinancing or debt consolidation to make payments more manageable.

Bottom Line – Building Your Business Credit

Remember, business credit is not only about getting access to financing; it has become the driving force for setting terms on business lines of credit, startup business loans, insurance premiums, lease payments, and trade credit. With a strong business credit profile, you can get more favorable rates and terms giving your company optimal use of its funding ability.

A good credit score will work in your favor, increasing your chance of immediate approval. The point should be kept in your mind that a low score could hold you back from being approved. You should consider your business credit to be every bit as important. Although building business credit may not have an impact on your personal life, it can certainly make or break your company.

This being said, by reviewing our 10 quick tips covering how to build business credit fast, as well as learning the basics of what business credit is and how it works, you will find it easier to make informed and confident decisions. Although it takes time to establish and build business credit, it is worth the effort. When you have a strong business credit history, it will work in your favor time and time again.

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