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Simply put, business credit is your company’s ability to borrow money. Healthy business credit demonstrates to lenders that your company’s finances are in order and if you borrow money, you’re likely to repay it.
Small business owners should explore building business credit independently of their personal finances to scale and expand. You may find more favorable loan terms and access to benefits unavailable to individual borrowers.
Here’s how to start building that credit.
What is business credit?
While both influence your ability to borrow, your personal credit and business credit are separate. Business credit is specific to your business name and EIN, as opposed to your name and Social Security number.
There are three major business credit bureaus: Equifax Business, Experian Business and Dun & Bradstreet. Small businesses should also know about FICO’s Small Business Scoring Service because Small Business Administration’s loan program checks SBSS scores.
Each bureau produces scores that measure your business’s creditworthiness based on its size, industry, credit utilization, account age, history of on-time payment and more. 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.
Having healthy business credit can help you access larger loan amounts and better terms. 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.
Building business credit: 7 steps
Creating a positive business credit rating is not complicated, but it does require action and dedication.
1. Establish a business entity
An essential first step to building your business credit is establishing your business as an entity separate from yourself. This involves selecting a business structure and, typically, filing paperwork with your state’s Secretary of State or small business administration. LLCs and corporations can establish business credit.
Once you have formally organized your business and registered it at the state level (if needed), you can take steps toward establishing separate bank accounts in your business’s name.
2. Register an EIN and DUNS number
Before opening business bank accounts, you will need an Employer ID Number (EIN), which you can apply for through the IRS. This keeps your Social Security number and personal finances separate from the business and affiliated income, which will route through your EIN and business accounts.
In order to establish creditworthiness with Dun & Bradstreet, you will want to register a DUNS number for your business. Separate from an EIN, this number allows Dun & Bradstreet to track the reliability and financial health of your company. Some business funding opportunities like small business grants or loans will ask for a DUNS number as a part of the application process.
3. Open business bank accounts
Once you have an EIN registered with the IRS, you should be clear to open business banking accounts (checking and savings are a great place to start).
From here, you can make deposits that are clearly separate from your personal finances and pay bills that are business-specific, including supply and lease costs. If your income qualifies, you will also want to make estimated tax payments from these business accounts.
4. Apply for a business credit card
Small business credit cards can be a great tool for floating expenses when income is spotty. Small business accounts often offer more appealing perks than personal credit cards, including expense tracking and cash-back rewards.
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.
You can also issue cards to authorized employees.
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.
5. Build a payment history
Whether paying rent on office space, your monthly credit card bill, or regular bills like a cell phone for business use, tending to bills on time (or even early) will help your business build a positive payment history. The longer your history of timely payments, the better your credit.
This is especially important for contracts you have with vendors that give data to business credit bureaus. 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.
6. 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.
7. Monitor credit reporting
Keeping up with your business credit report is wise, just as you should routinely check on your personal credit. Ensuring your business name and contact information remains accurate and up-to-date is important. You will also want to review outstanding balances and repayment information, taking steps to correct any outdated or inaccurate information.
FAQs about business credit
While personal and business credit are two separate entities, sometimes, they overlap. This happens when you are a sole proprietor: Your personal credit heavily impacts your business credit, and vice versa.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.
An EIN is issued by the IRS and used for tax purposes. A DUNS number is issued by the company Dun & Bradstreet and used to build your company’s business credit profile.
It depends on the bureau — each of the three business credit bureau issues several scores, each with its own scale. At Experian, business credit scores range from a low of 1 to a high of 100. The average business credit score is 62. SBSS scores range from 1 to 300, and many SBA lenders set minimum scores in the 160s.By contrast, Dun and Bradstreet’s delinquency score ranges from 1 to 5, and a lower score means a lower risk of late payment or bankruptcy.
Many business loan applications will consider your personal credit history in place of your business credit. If you apply for funding through the Small Business Administration or a traditional bank, you may need to build business credit first to prove financial stability.