Business credit. Like personal credit, it's one of those things that you're either watching like a hawk…or not paying attention to at all. But what do you do if you suddenly wake up out of your "Credit, who?" fog and realize it's time to seriously start building your business credit?
Well… lots of things. Because there are a lot of stops on the business credit train. But before you get overwhelmed by the prospect of building your business credit, know that the process isn't as hard, or intimidating, as you think. You just have to take action.
First things first, what is business credit? Business credit is your company's own credit history and score — separate from your personal credit — that lenders, vendors, and investors use to gauge how reliably your business pays its debts.
Establishing good credit now will make your future self very happy. Your business credit score directly impacts your ability to qualify for a business loan and the interest rate you'll receive. Investors are attracted to businesses with strong creditworthiness and are more likely to partner with companies showing good credit. Finally, your business credit is an asset of the business. If you sell your business, the business's credit score goes with it. Having good business credit increases the value of your business.
Read on to learn how to build and maintain good business credit. The most important thing to remember is your business's credit is an asset. Even if you don't need it yet, starting to build it now will open more doors in the future.
Is my business credit the same as my personal credit?
Before you dive into the business credit pond, there are a few things you should know about how business credit works in relation to your personal credit:
For sole proprietors and unincorporated partnerships, your personal credit is your business credit because you haven't taken steps to separate your personal identity from your business (more on that below).
For single member LLCs, incorporated partnerships, S-corps, and C-corps (collectively, corporations and other formal business entities), your business is separated from your personal identity and has its own credit report and score. This also means that your business credit score and history doesn't equal your personal credit score.
For some folks this will be good news, especially if your personal credit is less than stellar. But if you have amazing credit and were hoping to launch your business with a credit score of 850—you're out of luck.
Before you get all Eeyore on me, your personal credit can still help you build your business credit if you sign a personal guarantee when opening a business credit card or line of credit. A personal guarantee means that you personally agree to pay back any loan balances if your business is unable to. You are essentially co-signing a loan with your business. This is a great way to use your personal credit score to give your business a leg up.
Business and personal credit are also scored on different scales. While personal credit scores range from 300 to 850, business credit scores range from one to 100. If you check out your business credit score and are shocked that you have a 99—don't worry! That's actually very good news.
The three main business reporting agencies are Experian, Equifax, and Dun & Bradstreet (didn't see that coming, did ya?). These agencies collect information from creditors and vendors that work with your business.
6 steps to building business credit
Now that you've got the basics of business credit down, it's time to build that baby! The steps below should be done in the order listed as the steps build on each other.
1. Incorporate your business.
I'm looking at you sole props. If you're serious about building your business credit then incorporating your business — forming a corporation (or LLC) instead of staying a sole proprietorship — is the first step. Gusto’s research shows that solopreneurs who self-funded their business relied mostly on personal savings (86%), and 29% borrowed on a personal credit card.
Incorporating means legally registering your business as its own entity — separate from you personally — by filing paperwork (like articles of incorporation or organization) with your state. Once that's done, your business can get its own EIN, bank accounts, and credit history, distinct from your personal finances.
Doing this ensures that your business finances and credit history are separate from your personal credit history. That means your business can start building its own credit.
2. Establish your business.
Beyond incorporating your business, there are a few other steps you should take to establish your business:
Get an EIN (employer identification number) with the IRS: Don't let the name fool you! Even if you don't have employees, you should still get an EIN. It's free and helps you build your business credit. When you apply for a loan with just your social security number you will be relying on your personal credit. When you apply with an EIN, you will be pointing lenders in the direction of your business credit.
Open a business bank account: Keeping your business and personal finances separate is an essential part of establishing your business credit. It gives business credit agencies a bank reference and many lenders look for businesses that have established business bank accounts.
Get a dedicated business phone line and list it: This step is all about showing that your business does indeed stand on its own. Plus, when you have a dedicated phone line you can register with business directories, which credit agencies use to collect information. Consider listing your business and phone number with the Better Business Bureau, Yelp and YellowPages.com.
3. Get a D-U-N-S number.
D-U-N-S number is short for Data Universal Numbering System and is used by Dun & Bradstreet, one of the most well-known business credit agencies. Registering for a number is free, and when you do so, you open a business credit profile (also called a credit file) with the agency. While there's no requirement to have a file with Dun & Bradstreet, most suppliers and lenders use their credit score when reviewing your loan application.
4. Review your business credit report for errors.
If you're already an incorporated business, it's a good idea to do a thorough review your business credit report for errors before you move on to the other steps. Even if you haven't started building your business credit history, Experian and Equifax use public records to open a business credit file for you. If you've never looked at your business credit report, you DEF want to take a peek and see what's in there and scan for errors. Credit report mistakes take time to fix. It would be a bummer to go through all these steps only to discover that a mistake on your credit report is dragging down your score!
5. Open a line of credit with vendors and suppliers.
Opening a line of credit with your vendors, also known as a trade line, is one of the most important things you can do to build your business credit. Information about your trade lines shows up in your business credit file and impacts your credit score.
Open a line of credit with vendors or suppliers that you work with regularly. You want to be in a happy cycle of using your credit for purchases and then sending in on time (or early) payments.
Also, make sure these vendors report your payments to business credit agencies. When inquiring about a line of credit ask them if they report your payments. Ideally, you want three to five trade lines reporting to business credit agencies.
6. Open a business credit card or business line of credit.
A business credit card and business line of credit work the same way. A bank extends a certain amount of credit to you and you use this credit to make purchases (either by swiping your card or withdrawing money from your line of credit). Then, you (hopefully) pay back the credit you used in a timely manner. The cycle of using credit and paying it back is what builds your business credit.
Rather than using your business credit card or line of credit for big purchases that you can't afford, focus on using them for smaller items that you can easily pay back. Lenders want to know that you will pay back the money they loan you. Showing a history of on-time and full payments demonstrates exactly that and builds your creditworthiness over time.
For larger purchases you can still use your credit card or line of credit but be sure you have the money to pay back the purchase immediately or over a short period of time. Save up for the purchase before buying and then immediately pay off your credit card. If it's something that you need to pay off over several months, make sure that you'll have enough cash flow to sustain your business and make your payments.
Business credit best practices
As you take these steps to build your business credit, there are a few best practices that you should follow to ensure that you have the best score possible.
Make payments on time or early.
Whether you're paying off your trade lines or credit card, making payments on time is crucial to building your business credit. Dun & Bradstreet uses your payment history with vendors as one of its key factors in determining your credit score. Paying on time boosts your credit score, BUT paying early boosts it even more.
Don't open a bunch of credit cards.
You may be eager to hop on the credit building bandwagon by opening 500 credit cards, but don't! Just like personal credit, when you open and close multiple credit cards at once it lowers your credit score. When you open a credit card, the lender will access your credit file, which creates a hard inquiry on your credit report. Multiple hard inquiries will lower your credit score. Closing credit cards lowers you available credit which impacts your debt to credit ratio.
Instead of quantity, go for quality. Pick a credit card that you know you'll stick with for years to come. Again like personal credit, another factor that builds your credit is your credit history and how long you've had your accounts open.
Don't use all your credit.
Just because you have a credit limit of $10,000 does not mean you should go on a shopping spree. Your debt to credit ratio, which is how much credit you've used versus how much credit is available to you, impacts your credit score. The higher your debt to credit ratio, the lower your score.
That means that while you should be using your credit, you should not be using too much of it. An ideal debt to credit ratio is between one and 10 percent.
Monitor your business credit report.
Don't let your credit information become out of sight, out of mind. You should, at a minimum, monitor your credit report every year. If you're planning on applying for a loan or making a purchase that relies on your credit history, review your credit file several months beforehand. If you do find an error on your credit report, you will need time to resolve it.
While building your business credit does take time and patience, once you get into the habit of using and paying back what you borrow, you'll be on an express train to credit mastery. And you might find yourself pouring over your business credit reports just for the sheer delight of watching your credit score grow.
FAQs
Is business credit the same as personal credit?
Not always. For sole proprietors and unincorporated partnerships, your personal credit is your business credit. But single-member LLCs, incorporated partnerships, S-corps, and C-corps have a separate business credit report and score once properly established.
What credit score range do businesses use?
Business credit scores typically range from 1 to 100, unlike personal credit scores, which range from 300 to 850. A score in the high 90s is considered very good.
What are the main steps to building business credit?
The core steps are: incorporate your business, establish it with an EIN and a business bank account, get a D.U.N.S. number from Dun & Bradstreet, review your business credit report for errors, open trade lines with vendors and suppliers, and open a business credit card or line of credit.
Which agencies track business credit?
The three main business credit reporting agencies are Experian, Equifax Business, and Dun & Bradstreet. They collect information from creditors and vendors that work with your business.
What's an ideal debt-to-credit ratio for a business?
An ideal debt-to-credit ratio—how much of your available credit you're actually using—is between 1 and 10 percent. Using too much of your available credit can lower your business credit score.
