You have motivation, moxie, and one great idea. That’s the good news. The bad news? Not every business gets to celebrate its tenth anniversary. According to the US Bureau of Labor Statistics, only 34.7 percent of US private-sector businesses that began in March 2013 were still in operation a decade later in March 2023.
A business can flop in many ways—including crummy management, poor market fit, and uncompetitive pricing, to name a few possible reasons—and the result is always the same: not enough cash to stay afloat. That’s why access to business credit is crucial to success while you work through your brilliant business plan.
Here’s a quick but powerful guide to improving business credit to help you open up those lending floodgates:
Why business loans are denied
The top reasons banks may not lend to a business include:
- Poor credit history: Low credit scores or a history of late payments signals risk to lenders.
- Insufficient collateral: Banks often require collateral to secure loans, so getting funding is challenging if your business doesn’t have assets to pledge.
- Inadequate cash flow: Banks assess a business’s ability to repay loans based on its cash flow. Lenders may hesitate if cash flow projections are weak or inconsistent.
- Limited business history: Without a proven track record, startups and businesses with a short operating history usually struggle to get bank loans.
- High debt-to-income ratio: Banks are reluctant to extend additional credit to a business that already has significant debt relative to its income.
- No business plan: A well-developed business plan is essential for demonstrating a clear path to profitability and loan repayment.
- Industry risk: Some industries are considered higher risk by lenders, making lending more challenging.
But the number one reason small businesses can’t secure funding is creditworthiness. So, raising your small business credit score should be a top priority—followed by bolstering cash flow, ensuring collateral, and developing a strong business plan. You may also need to address your personal credit score (you can get a free personal credit check from several organizations, such as Credit Karma, which offers free checks for a couple of consumer credit bureaus). If you have bad credit, you should create a plan to address the issues dragging your score down.
Building your business credit score: a 30-day plan
There’s a lot small business owners can do to build business credit fast. We’ll review this list as if you’re starting a new business, but established businesses can benefit from most of this action plan.
Incorporate your business
Creating a separate legal entity for your business is crucial for separating your personal finances from your business finances. That means establishing a limited liability company (LLC) or corporation instead of a sole proprietorship or partnership. This business structure allows the company to be legally and financially independent, building its credit profile separate from personal credit.
Lenders and creditors typically assess the creditworthiness of the business entity, which is bolstered by a strong business credit history. It also offers important tax advantages, such as the ability to deduct business expenses, access certain tax credits, and potentially lower tax rates.
Get an Employer Identification Number (EIN)
Apply for an EIN from the IRS. An EIN is like a business’s Social Security number and is a unique identifier for business tax purposes. You’ll need the following information:
- Business name
- Entity type
- Responsible party’s name
- Social security number
- Reason for applying
- Business address and phone number
- Any additional required information
Lenders and credit bureaus use the EIN to track financial activity, ensuring accurate reporting and facilitating the establishment of a separate credit profile for the business.
Open a business bank account
Choose a bank that reports business account activity to business credit reporting agencies (aka credit bureaus). This will help you build good business credit from day one.
Maintain a positive balance and practice responsible banking habits to ensure your credit reporting is positive. And don’t forget to develop good relationships with the business banker and other people at your bank. They can offer you a wealth of knowledge, from how to best qualify for small business loans to the best business lending options at the bank.
Apply for a business credit card
Look for cards designed for small businesses or a business line of credit. Both offer revolving credit lines with a specified credit limit that can be used for business needs. Some credit cards and lines of credit come with annual fees or higher-than-average interest rates, so compare your options before applying.
Your personal credit score is often used when applying for a business credit card, especially for small businesses and startups. Even though your personal credit and your business credit are technically separate, your personal credit history is typically checked in these instances, since you would have to provide a personal guarantee that you would pay for your debt with personal means if not with your business assets. If you can’t qualify for an unsecured credit card, consider a secured business credit card backed by a cash deposit. A secured card can help establish credit.
Always make timely payments to start building a positive credit history. Even better if you can pay early. (Certain business credit bureaus give their top scores to companies that pay in advance. For example, Dun & Bradstreet reserves those best scores for those who pay 20 to 30 days in advance.) It’s also a very good practice to pay off all or most of your balance to keep your credit utilization low.
Establish trade credit
Work with vendors who report payments to business credit bureaus, and pay invoices promptly. With trade credit, also known as vendor credit or net terms, a business can agree on establishing net 30 accounts with its suppliers or service providers, which simply means that they extend a line of credit for 30 days after the goods are delivered or the services are provided. That’s the amount of time the business has to pay the vendor, and some may extend that time period for net 60 days or longer. For example, Uline, which distributes shipping, packaging, and industrial supplies, allows customers to pay within 30 days of receiving an invoice, once they have established a net billing account.
Establishing trade credit is crucial for building business credit, as it demonstrates the ability to manage business-related debts responsibly. Timely payments to suppliers and vendors, reported to credit bureaus, contribute to a positive credit history, enhancing credibility with lenders and potentially improving access to financing options for the business.
Monitor your credit reports
You should regularly review your business credit file, a comprehensive record maintained by credit bureaus that contains information about a business’s credit history and financial activity. You should also review your business tradelines, which are individual records of credit activity associated with specific business credit accounts.
You should review your scores from all major business credit bureaus, but keep in mind that they’re different from the standard FICO score we’re used to hearing about for personal credit history. A good business credit score can vary based on the credit bureau:
- Experian Business
- Intelliscore Plus: 0 to 100 (the latter indicates low risk)
- Equifax Business
- Four business credit scores:
- Credit information: The lower the better, and a number as high as 70 would set off an alert, indicating a risk of delinquency (note: the number 20 is used for companies with no information)
- Payment Index: 0 to 99 (0 indicates all timely payments)
- Commercial Delinquency Score: 101 to 662 (high score indicates lower probability of delinquency on any account within 12 months)
- Business Failure Risk Score: 1,001 to 1,722 (high score indicates lower probability of failure within the next 12 months)
- Four business credit scores:
- Dun & Bradstreet
- The risk assessment factors in the company’s current and future health, credit history, and payment performance, along with forecasting whether the company will or won’t become delinquent or cease operations, and includes:
- D&B Viability Rating: 1 to 9 (with 1 indicating low risk)
- D&B Failure Score: 1 to 100 (the latter indicates low risk)
- D&B Delinquency Score: 1 to 100 (the latter indicates low risk)
- D&B PAYDEX: 0 to 100 (the latter indicates low risk based on credit history and payment performance over the past two years)
- The risk assessment factors in the company’s current and future health, credit history, and payment performance, along with forecasting whether the company will or won’t become delinquent or cease operations, and includes:
- Creditsafe
- Credit Score: 1 to 100 (the latter indicates the lowest risk for whether a business will become delinquent or go bankrupt within the next 12 months)
- FICO Small Business Scoring Service (FICO SBSS)
- SBSS: 0 to 300 (the minimum score for a Small Business Administration 7(a) Small loan is 155, and generally, higher is better for lenders)
This ensures accuracy and addresses any errors promptly. To monitor your scores, you can visit the reporting agency’s website and register your business (for example, you need a DUNS number to monitor your Dun & Bradstreet PAYDEX score). You can also enroll in a Nav account, which grants you access to data from several reporting agencies in one place.
Monitoring credit reports is essential for building business credit. It allows businesses to track their credit standing, catch errors, and address issues as soon as they arise. Identifying and correcting inaccuracies quickly helps maintain a positive credit profile, increasing credibility with lenders and ensuring access to favorable financing terms.
Building good business credit takes time and consistency
Building a strong business credit rating takes time and consistent financial management. Focus on responsible borrowing and payment practices to gradually improve your business credit profile over the long term, including:
- Effective budgeting
- On-time payment history
- Monitoring cash flow
- Building a strong emergency fund
- Building down payments for future investments
- Managing debt
- Reinvesting into business expansion
- Establishing financial controls
Consulting with accountants, financial advisors, or business mentors can provide valuable insights and guidance for sound financial decision-making. Don’t be afraid to start building your network now.
