How to Build Business Credit | The Ultimate Guide

Small business owners have a ton of things to worry about, but something they should all consider is establishing business credit. Establishing and building business credit can open many financial doors for your business. It is especially important for putting your company on a path to future growth, giving you the ability to borrow money at affordable rates as needed. Read on to find out how to build business credit and why it’s so important for your company.

What Is Business Credit and Why Is it Important?

Establishing business credit is a critical step for any new business. It puts your business on the map in terms of having an official credit profile, which will be reviewed in a number of ways throughout your time in business. An established credit profile is essential when seeking a loan because lenders and other companies will run your business credit before doing business with you. Establishing business credit also helps you maintain a credit history separate from your personal credit history, which prevents your business from affecting your personal credit and vice versa. It also demonstrates a separation between owners and the business. Demonstrating that the business is separate from the owner is important unless you’re operating your small business as a sole proprietorship or general partnership, which is an exception. One of the main benefits of forming a corporation or limited liability company (LLC) is that doing so automatically separates you, the owner, from the business, which itself becomes its own entity. These two business structures provide the owners with protection of their personal assets from being caught up with the business’s finances, which is especially important in cases such as lawsuits. You can maintain this protection by consistently showing a clear separation between the owners and the business. There are three major business credit bureaus, two of which you’ll probably recognize because they also report personal credit. You’ll check your business credit score with these agencies once you’ve established business credit. The three business credit bureaus are:

• Dun & Bradstreet
• Equifax Small Business
• Experian Business

These three agencies are commercial credit reporting bureaus that collect information about the financial health and record of your company. Some of the principal factors they look at include how much debt your company owes and how timely you’ve been with payments. These business credit bureaus collect this financial information, compiles it and uses it to assess and assign your company different types of ­scores, such as a business credit score or a delinquency score, which measures how likely it is your business will pay its debts or not. Various credit scores are extremely important to lenders and others considering doing business with you; they'll review these scores in order to determine your company’s financial stability and evaluate the risk that your business will or won’t fulfill its obligations, such as debts and contracts.

How to Establish Business Credit

Establishing business credit requires a few steps to set up. Naturally, one of the first steps is actually coming up with a business to start. From there, take these key steps to establish and build your business credit:

1. Incorporate Your Business

You may have already incorporated your business, but this is such an essential step that must be addressed. With business entities like sole proprietorships and general partnerships, the business is legally the same as the owner. Thus, a business owner's personal credit history could also impact the financial success of the business. If you decide to incorporate a business or form an LLC, you create a business that is legally distinct and separate from the owner or owners.

2. Get an EIN

A federal employer identification number, also called an EIN, is essentially like a Social Security number for your business. An EIN is required for federal tax filings and also required to open a business bank account in the name of your corporation or LLC, instead of in your personal name. Another important aspect of getting an EIN is that many businesses require an employer identification number from their vendors so that they can pay them for services provided.

3. Open a Business Bank Account

The next step is to open a business bank account, namely a business checking account at first, in the legal name of the business. With this business bank account established, make sure to pay financial transactions of the business from that account. This will once again reinforce the separation of your personal finances from those of the company.

4. Obtain a Business Credit Card

While you’re opening a business bank account, it’s a good idea to acquire at least one business credit card that is not connected to you or any other owners personally. Ideally, you should choose a business credit card from a company that reports to the credit reporting agencies. Businesses that report your business credit card usage can help you start building business credit as you make purchases and payments. When you have a business credit card, make sure you pay the credit card bill on time or early from your business checking account.

5. Set Up a Business Phone Number

You should also establish a separate phone number for your business and under your company’s legal name. Be sure to list the business phone number online.

6. Open a Business Credit File

The above steps are not enough to build business credit, but they're a start. At this stage, the business credit bureaus aren’t aware of you and won’t have a business credit score until you have registered your business with them. To do this, open a business credit file with all three commercial credit business reporting agencies: Dun & Bradstreet, Equifax and Experian. You can do this by going to their websites and filling out their online forms.

7. Open a Line of Credit with Vendors or Suppliers

Vendors and suppliers are a key part of building business credit. You should try to work with at least five vendors or suppliers to establish credit for your company to use when purchasing from them. Many but not all vendors automatically report transactions to the business credit bureaus. If they don’t, ask them to report your payment history to the credit reporting agencies so you can build your business credit.

8. Pay Your Bills on Time (or Early)

As with personal credit, make sure to pay the bills on time for your business. Late payments will negatively impact your business credit score and potentially raise issues with securing finances in the future. It’s one thing to hurt your personal credit score and then repair it on your own. It’s another to hurt your business credit score and undermine the entire operation and employees of your business. Additionally, paying your bills or invoices before the due date can also positively impact your business credit score, particularly your Dun & Bradstreet Rating. Paying invoices early can lead to your business being classified as paying "better than terms."

The Bottom Line

Credit is essentially what makes the financial world turn. Establishing good business credit can provide several benefits. For example, your business could get more favorable payment terms with new vendors and suppliers, plus it enables your business to receive better interest rates and credit terms from lenders and banks. Once you’ve established your company’s business credit, the next step is to maintain it. Make sure to monitor your credit for any changes, both good and bad. Utilize the three business bureau credit agencies to get a business credit report for your company, so you can see first-hand what lenders and other businesses see. Lastly, pay your business credit purchases early or on time every time.