While having strong personal credit will certainly help you as a small business owner, it’s not enough if you hope to truly benefit from lines of credit for your business in the long run. If, for example, you hope to leverage a small business term loan, business credit cards, or a business line of credit, you’ll need a solid business credit history and score to get approved for higher amounts and lower interest rates. That’s why it’s important that you know how to establish business credit and build your business credit history over time.
Business credit is in many ways very similar to personal credit. It’s basically an accounting of how your company has handled financial obligations and credit in the past, used to calculate how much risk is involved in lending to your business. While your personal credit is connected to your social security number (SSN), your business credit is tied to your employer identification number (EIN).
The three major credit reporting bureaus for business credit are Dun & Bradstreet, Equifax, and Experian. Each assigns your company a credit score, but it varies between agencies because each one has its own algorithm for arriving at a number. Business credit scores generally range from 1 to 100—the higher the number, the better, or the more creditworthy your business is considered.
Now, let’s take a look at how to establish business credit. The sooner you start building your business credit history, and the more ways you do so, the better.
Establishing and Building Business Credit
- Assuming it makes sense to do so, register your business as a C-corporation, S-corporation, limited liability company (LLC), or limited liability partnership (LLP). These entities establish business credit; others, like a general partnership or sole proprietorship, are only tied to your personal credit.
- Get an EIN. It’s required with many business entities, but not all. Even if you don’t have to get one, do so anyway, as this is a necessary step for establishing business credit. It’s also a good idea because it helps separate your personal and business finances.
- Open a business bank account. This too is important for keeping your personal and business finances separate, and lenders to businesses typically look for those with business accounts that have been established for at least a few years. Your bank will report key information from the account to the credit bureaus. Use this account for paying your business expenses.
- Create a dedicated address and phone number for your small business. Make sure your company is listed on major online business directory websites (like Google My Business, the Better Business Bureau, Yellow Pages, etc.), and be sure the contact information is correct and consistent on every site.
- Keep your basic business profile information up to date with each of the three business credit reporting bureaus.
- Open a credit file with Dun & Bradstreet by applying for a data universal number system (DUNS) number. It’s free, and takes up to about 30 days. Most lenders and suppliers will look for your credit history through Dun & Bradstreet, so it’s smart to be on their books. Sometimes, you’ll even have to have a DUNS number, like if you’re applying for an SBA loan, grant, or contract with the federal government.
- Pay all of your bills on time. Late payments do significant damage to your business credit history and score.
- Establish trade credit with your vendors and suppliers. This refers to an arrangement where you pay for their goods and services days or weeks after you receive them. Confirm that the supplier reports to the credit bureaus, though, as not all do. Always pay on time.
- Get a business credit card or a business line of credit. It may not be much at first, depending on your personal credit score and whether you have any business credit history, but you must start using business credit. Use these responsibly; don’t max out your credit, and try to pay off all balances each month.
- Over time, use a variety of types of business credit accounts. Use them responsibly, though, and always make payments on time. Aim to keep your credit utilization at 30 percent or less; a high utilization hurts your business credit score.
- Review your business credit reports at least once per year to ensure there are no errors. If you find any, visit the applicable bureaus’ websites and follow their instructions for contesting incorrect information.