How to build business credit

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Dear Business Banter,

I’m so excited, I’ve just started my business! But I’m still trying to figure a lot of stuff out. For example, how is business credit different from my personal credit? And how do I even begin to build it? – Jessica

Dear Jessica,

Well, I’m thrilled for you! You’ve got quite a few tasks ahead, but try not to get overwhelmed. Take it step by step and you’ll be fine. In fact, you probably know a lot more than you think about building business credit if you’ve had and used your own credit cards and loans. The overall concept is similar.

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

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

What is business credit?

In its most basic sense, business credit is your company’s ability to borrow money. Business credit products include credit cards, lines of credit and installment loans.

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 vender (people or businesses that supply goods or services to your company) obligations, 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:

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.

Business credit vs. personal credit

Personal credit is anything associated with you and your name—such as credit cards, student loans, car financing and mortgages.

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.

What you should do, though:

  • Decide on a trade name. Maybe you offer personal fitness training sessions, so you might want to call your business something like, “Shape Up with Jessica.” Whatever the name, it’s your way of defining the business.
  • Open a bank account specifically for the business. A dedicated checking and savings account for your venture will not just keep you organized, it will be helpful for tax purposes and financial projections.
  • Apply for a business credit card. 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.

See related: How to apply for a business credit card

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. Get business credit in your company’s legal name. The easiest way to establish business credit is with a credit card. There are many cards for the 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.
  2. Add a loan or line of credit. Just as with personal credit reports, it helps to have a variety of credit products listed on your business credit file. 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.
  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.
  6. Monitor your reports. On a regular basis, review each of the business credit files for accuracy. Check for (and fix) outdated or inaccurate information—especially before you apply for more loans and credit cards.

With this plan, you can the build 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.

Remember: while establishing good business credit takes some work, the effort pays off!

Written by
Erica Sandberg
Credit And Money Management Expert Contributor
Erica Sandberg is a credit and money management expert who began her career at Consumer Credit Counseling Service (CCCS). There, she helped individuals and families overcome their debt issues and developed budgets, then transitioned into the agency’s primary media spokesperson.