Just like personal credit scores, businesses must have a strong credit history, a positive payment history, and a good financial track record in order to operate successfully. This guide provides detailed information about how to establish and build credit as a business owner.
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Owning and operating a business is a dream of many, as it provides a sound way to earn an income on your own terms. With more than 30 million small businesses currently in operation through the United States and a steady projection of growth in years to come, many men and women with an entrepreneurial spirit may be inclined to jump on board with owning a small business.
However, there are several considerations that must be thought through in order to run an effective, successful, and profitable small business.
One of the most important factors in establishing a sustainable small business is the concept of business credit. Most business owners are aware that personal credit scores and history have an impact on their financial lives, but they don’t always equate the same idea to business ownership.
For example, many business owners might not understand the Paydex score, which is similar to the personal finance FICO score. They may not understand concepts like credit risk score, and how to be rated as a low-risk borrower as a business as opposed to consumer credit guidelines. They may also not completely understand the impact making late payments as a business can have on their ability to borrow money.
There are business credit reporting agencies, credit utilization concepts and other relevant information that businesses need to know about their credit. This can be especially important for startups and small business owners who may need financing to start or grow their business.
In this guide, we will break down what business credit is and how it differs from personal credit, why it is important, and how American business owners can establish and build it over time.
On this page:
- What is Business Credit?
- Why Do You Need Business Credit?
- How to Establish Business Credit
- Business Credit Bureaus
What Is Business Credit?
Business credit is a representation of the financial strength and track record of a business. Like personal credit and a personal credit score, business credit alerts new potential creditors to how responsible the business, and its owner, are when managing borrowed funds.
Business credit includes information about the length of time a company has used other credit sources, like credit cards, working capital loans, and other small business loans. It also provides a quick snapshot of how prior or current financed funding is used and ultimately repaid. When businesses do not take care to manage borrowed funds well, the business credit score and the business’s credit history may suffer.
In some cases, business credit is tied closely to personal credit scores and history. This typically takes place when a business owner does not separate personal finances from business operations.
For instance, using a personal credit card for business expenses does not help establish or build business credit, but instead works toward creating a history for the business owner’s personal credit. While this may seem easier than building a credit profile for a business from scratch, it comes at a price for business owners.
Leaning heavily on personal credit to cover business expenses means that the individual owner is liable for business debts, not the company itself. Missing this important aspect of business ownership can ultimately cost business owners a substantial amount.
Why Do You Need Business Credit?
In addition to the importance of separating business finances from personal finances, business owners should recognize that establishing business credit lends a necessary hand in creating affordable borrowing opportunities in the future.
Like personal credit, strong business credit scores and reports allow companies to finance large transactions and purchases in a much more cost-effective way.
With a strong business credit profile, companies can secure lower interest rates, more amenable repayment terms, and greater access to cash when it is needed most. Businesses with well-established business credit may qualify for unsecured loans as well, meaning there is no need to put collateral on the line to back up a business loan.
Each of these benefits of establishing and building business credit lays the groundwork for a successful business operation that leverages financing when it is needed.
How to Establish Business Credit
The importance of building business credit is one thing; the steps for making it happen are another. Below are several ways to establish business credit, whether you are a new company or an old pro.
Establish a Business Entity
The first step in establishing business credit is creating a legal entity for the company you own and run. There are several types of business entities you can choose from, from limited liability companies, or LLCs, to corporations, sole proprietorships, and partnerships. However, LLCs and corporations are best suited for business owners who want to establish business credit.
These types of business entities mean your personal assets—and credit—are protected in the event the business runs into financial trouble. These entities also allow you to build business credit separate from your personal credit score, giving you the option to apply for new credit under the business name.
Get a Federal Tax ID
Once you have established a business entity, you can apply for a federal tax ID, also known as your Employer Identification Number (EIN). With an EIN, you can do several things, including pay employees, operate as a corporation, file tax returns, and establish a business bank account. This lays the groundwork for building business credit over time.
Open a Business Bank Account
With your EIN in tow, establishing a business bank account is your next step toward creating a business credit profile for your company. Having a business checking or savings account is necessary to keep your personal and business finances separate, but it also creates credibility for your company with customers, vendors, suppliers, and creditors.
Having a business bank account also makes it easier to get approved for a business credit card, working capital loan, or other financing from business lenders.
Establish Contact Information for Your Business
It may seem unnecessary, but having contact information registered to your business is a crucial step toward building business credit. Lenders are wary of companies that do not have a physical address, phone number, or other contact information readily available, so be sure to take this simple but important step. This is also critical for acquiring a DUNS number.
Apply for a D-U-N-S Number
A D-U-N-S number is also necessary for establishing and building business credit. Provided by Dun & Bradstreet, the leading credit reporting organization for businesses, a D-U-N-S number is a nine-digit identifier used to establish a credit file for companies. Lenders use the D-U-N-S number to help determine if a business has a strong or weak credit history, and it is required for companies that bid on government proposals. D-U-N-S numbers are provided at no cost to businesses, and the process can be done easily online.
Get a Business Credit Card
Once you have a business bank account, an EIN, and a D-U-N-S number, you may be eligible to apply for a business credit card. While a bank or credit union may evaluate your personal credit as part of the application process, getting a credit card in the name of the business is helpful to kickstart your business credit history. It is often a good choice to apply with the same financial institution where your business bank account is held.
Another way to build credit as a business is to establish strong relationships with vendors that involve business lines of credit. Not all vendors will be willing to extend credit to a new company, but over time, having credit lines with vendors can have a positive impact on your business credit score. Be sure to ask your vendors to report your credit lines and payments to the business credit bureaus.
Make On-Time Payments
The most important step you can take toward building your business credit is to make on-time payments for all your accounts. This includes business credit cards, loans, vendor credit lines, and the like.
Like personal credit, your business credit score is dependent on the level of financial responsibility the company shows through credit management over time. Missing a payment here or there may not seem like a significant issue, but it can ding your business credit just as much as it would on a personal credit card or loan.
Business Credit Bureaus
Similar to personal credit reports, business owners also have access to their credit information through credit bureaus.
However, instead of Equifax, Experian, and TransUnion, business credit bureaus include Dun & Bradstreet, Experian for Business, Equifax for Business, and Paynet. Each business credit bureau receives information on a company’s credit activities, including credit card and line of credit limits and payments, business loan terms and payments, and vendor credit lines and payments. This data is then used to calculate business credit scores.
A company’s credit profile differs from a personal credit report in that additional information is also used to determine how responsible a business is with its financial obligations and operation over time.
Business credit bureaus also use corporate financial reports, contracts and grants, news and media stories, interviews with company officials, and banking information to come up with a business credit score. Because of these added details, businesses must take extra care to safeguard their reputation alongside strong financial management.
Establishing and maintaining business credit is a crucial part of operating a successful business over time.
Start with creating a business entity that transfers liability from you personally to the business, then follow up with establishing business bank accounts, identification numbers, and up-to-date contact information.
Consider your options for opening a business credit card or taking out a business loan, or work with vendors to establish credit lines that report to the credit bureaus. With these steps, your small business can establish good business credit and ultimately be eligible for the most affordable financing when capital is needed in the future.