The overall concept is simple. Business credit is your company’s ability to borrow money. It is important to establish strong business credit when building a strong business. Why? Because much like personal credit, a solid business credit portfolio provides insight into how successful a business is to lenders, investors and even potential business partners.

Here is how to build business credit in easy, bite-sized pieces.

What is business credit?

In its most basic sense, business credit shows banks and other stakeholders that your company is financially stable. Business credit products include credit cards, lines of credit and installment loans. Anyone can access your business credit score, so keep in mind it may be used by lenders, suppliers and even potential business partners contemplating doing business with you.

When you establish good business credit, you may have an easier time qualifying for small business loans or financing. Plus, you may even secure financing with lower interest rates.

Business credit reports

A lender will determine qualification, loan or credit line amounts, interest rates and terms by reviewing your business credit reports, which are prepared by Dun & Bradstreet, Experian Business and Equifax Business.

These reports contain a wealth of information that a financial institution can use to understand the risks associated in extending credit products to the business. How the business has managed past credit and vendor obligations (people or businesses that supply goods or services to your company), current debt, number of years in operation, annual earnings and legal structure are all listed.

Unlike consumer credit reports, the files don’t start up automatically—it’s going to take some heavy lifting. To open a business credit file for all three business credit reporting bureaus:

  • Get a separate business phone number.
  • Open a bank account in the businesses’ name.
  • Establish a separate legal business entity, such as a partnership, cooperation or LLC.
  • Obtain an Employer Identification Number from the IRS.
  • For Dun & Bradstreet, apply for a D-U-N-S number, which will be your businesses’ nine-digit identifier.

Then, when you begin taking out credit products in the businesses’ name and forming relationships with vendors, those companies will start to supply the business credit reporters with information.

How to build business credit

Presuming your business is not a sole proprietorship, you can begin to build your business credit history. Creating a positive business credit rating is not complicated, but it does require action and dedication:

1. Register your business

A business operated as a Limited Liability Company (LLC) can establish business credit. If you haven’t done so already, you will need to register your business with the appropriate government entities in order to establish your business credit profile. Once you have registered your business, you can apply for an employer identification number (EIN). This is also known as a federal tax identification number and it will allow you to start building your business credit.

2. Get a business credit card

The easiest way to establish business credit is with a credit card. There are many credit cards for a small business owner. Most offer expense tracking features and valuable rewards programs that are tailored to the needs of small business owners. You may even get a credit card that offers 0 percent APR for a year or more, which will help you finance your start-up costs or ongoing operations with no interest added in that introductory time frame.

Just as with personal credit reports, it helps to have a variety of credit products listed on your business credit file. Small business loans are great if you need to borrow a substantial amount of money all at once, then repay in equal installments. Interest is built into the payments. Lines of credit are appropriate for fluctuating or emergency expenses, since you can draw from the line as needed and only pay interest on the amount you borrow.

3. Pay credit products on time

All lenders will want to see that you have been paying each of your credit accounts on your file on time. The more on-time payments, the better your credit.

4. Keep revolving debt low

While you want to use your credit cards and lines of credit for all of your business expenses, always keep the limit in mind. If you consistently hold balances that are close to (or at) the maximum, it will negatively affect your business credit. Much like personal credit cards, limit your spending to 30 percent of your credit limit. However, the lower the better.

5. Manage vendors responsibly.

If you have contracts with vendors that furnish data to business credit reports, keep them happy. Pay those bills on time. Additionally, if a vendor extends trade credit, meaning you can pay any amounts owed after you receive your inventory, you can ask your supplier to report your payments to a business credit bureau. This ensures your business credit score will reflect your on-time payments. You want to take advantage of any boosts you can get. But if you don’t pay your bills on time, this will negatively affect your business credit score, so pay on time—always.

6. Monitor your credit reports.

On a regular basis, monitor each of the business credit files for accuracy. Check for (and fix) outdated or inaccurate information—especially before you apply for a loan or credit card. With this plan, you can build the business credit you need to qualify for the best credit products available. There will be no reason to overpay due to excessively high interest rates or get stuck because you can’t borrow enough to reach your goals. Establishing good business credit takes some work, but the effort really pays off.

But what about personal credit?

While personal and business credit are two separate entities, sometimes, they are mutually inclusive. This happens when you are a sole proprietor (you have an individual entrepreneurship) and there isn’t a legal distinction between you and the business, so you don’t form a business credit file. Your personal credit is your business credit.

In general, sole proprietors can get approved for a business credit card because qualification depends on your personal credit history. The card will show up on your consumer credit reports, though, so treat it responsibly. If you don’t, and it goes delinquent or into default, your credit will be damaged, and the creditor can take legal action against you.

The bottom line

When you establish a strong business history, that is reflected in your business credit score and it will make running your business significantly easier. By doing so, you are opening the door to strong relationships with business entities you work with or alongside in order to keep your business running. It takes time to build business credit, so it’s wise to start establishing good habits sooner rather than later.

Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.