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Just like you, your business has a credit score that measures how it handles debt. And just like your personal credit score, a good business credit score can expand your financial opportunities.
Understanding what business credit is, how it works and how to use it can help you create a successful business. Here are eight steps to building business credit, including registering your business, opening a business bank account and applying for trade credit.
What Is Business Credit?
Your business credit score measures your business's history of managing credit. It's similar to your personal credit score, but is a separate score specifically for your business. Lenders, vendors and others may check your business credit report and business credit score when you apply for a business loan, business credit card or trade credit. Business credit scores range from 0 to 100, with scores above 75 typically considered excellent.
Three major commercial credit bureaus—Experian, Dun & Bradstreet (D&B) and Equifax—maintain business credit reports and calculate business credit scores. Although each credit bureau computes business credit scores using its own methods, they all consider factors such as your business's total debt, its track record of timely payments and how long your business has used credit. They also consider other factors, such as your business size and any judgments or liens against your business, to determine your business's financial health.
Benefits of Building Business Credit
There are several benefits to building business credit.
- Gives you access to more financing: Although you can use some types of personal loans to finance your business, the amount you can borrow is often capped at $100,000, which may not be enough for your business needs. Business loans guaranteed by the U.S. Small Business Administration are available for up to $5.5 million. Good business credit can also qualify you for higher limits on business credit cards or business lines of credit.
- Helps lower the cost of doing business: Having a good business credit score can qualify you for lower interest rates on business loans, business credit cards and business lines of credit. But that's not the only way good business credit can save you money. A higher business credit score can help you qualify for lower-cost business insurance, equipment leases and real estate leases too.
- Provides a safety net for tough financial times: A good business credit score can make it easier to get a business line of credit—a useful tool when sales are slow. Tapping your business line of credit can help you make payroll, purchase inventory or supplies and keep your business running even when cash is tight.
- Improves trade credit terms: Vendors and suppliers typically check your business credit score before extending credit. A good business credit score can mean higher trade credit limits and longer payment terms, boosting your cash flow.
- Helps you land business: Potential customers, clients or business partners may review your business credit report and credit score before deciding to work with you. They'll typically be more willing to do business if your business credit score indicates financial stability and positive payment habits.
How to Build Business Credit
To build business credit, follow these steps.
1. Register Your Business
Choose your legal form of business and register your company to begin the process of establishing its identity. Options include registering as an LLC (limited liability company), C corporation or S corporation. Consulting an attorney or tax advisor can help you make the right decision.
2. Apply for an Employer Identification Number
The IRS assigns employer identification numbers (EINs) to U.S. businesses for tax purposes. You'll need this number to open a business bank account and file business taxes; it also helps separate your business and personal finances. The easiest way to get an EIN is to apply online at the IRS website.
3. Apply for a D-U-N-S Number
Registering a D-U-N-S Number for your business with Dun & Bradstreet is free. Doing so enters your business in the Dun & Bradstreet database, confirming it as an established business and enabling creditors to report your payment activity. Banks, government agencies and lenders may also use your D-U-N-S Number to verify your company's legitimacy.
4. Establish Your Business Presence
Vendors, lenders and others will want confirmation that your business is a legitimate entity. Getting a business address, a dedicated business phone number and a business website will all help establish this. Set up social media accounts and use a business email address (not a free email service such as Gmail or Yahoo).
5. Open Bank Accounts in Your Business's Name
Business checking and savings accounts are available from traditional banks, credit unions and online-only banks. Evaluate the features your business needs, such as the ability to accept payment cards, and consider factors such as fees, interest rates, services and convenience when choosing your business bank.
Learn more >> How to Open a Business Bank Account
6. Apply for Trade Credit
Getting trade credit from vendors and suppliers lets you extend payment terms—for example, paying a vendor in 30 days, rather than paying cash on delivery. Trade credit can also help build your business credit if you make timely payments.
However, trade credit won't impact your business credit score unless the vendor or supplier reports your payments to business credit bureaus. Check the company's policy before applying for tradelines; if an existing vendor doesn't report, ask if they'll consider doing so.
7. Apply for Business Credit Cards
Card issuers check your personal credit score when you apply for a business credit card. However, not all of them report payment activity to consumer credit bureaus. Check with the card issuer before applying to see where they report. If the card issuer reports payment activity to commercial credit bureaus, paying your business credit card balance on time can build your business credit history.
Tip: Business credit cards typically require a personal guarantee, meaning you're personally liable for debt that goes unpaid.
Learn more >> How Do I Qualify for a Small Business Credit Card?
8. Use Business Credit Responsibly
Pay your business credit cards on time, and keep your credit utilization below 30% to avoid negative impacts to your business credit score. Better yet, keep credit utilization below 10% to help boost your business credit score. Make it a habit to pay trade credit accounts on time—or early.
Ways to Use Business Credit
There are several ways to use your good business credit score to better manage your business finances.
- Utilize business credit cards. Business credit cards can help you cover day-to-day expenses, such as business travel, office supplies or entertaining. Most also offer rewards that can save your business money.
- Stretch out payment times. Tradelines give you more time to pay your vendors and suppliers. This can boost your cash flow by keeping money in your bank account longer.
- Cover short-term needs. Business lines of credit can finance short-term working capital needs such as purchasing inventory or paying employees.
- Apply for loans. Business loans are an option once you've established a business credit history. Lenders typically check both your personal and business credit scores when you apply for a small business loan.
Frequently Asked Questions
To start building business credit right away, apply for trade credit and a business credit card as soon as you've registered your business and opened a business bank account. Then, pay all your bills on time to help build a strong payment history.
If you're planning to get a business loan early on, be sure the lender reports payments to the business credit bureaus so you get credit for those loan payments.
Your business and personal credit reports and credit scores are separate. However, your business credit card use can impact your personal credit score if the card issuer reports payment activity to consumer credit bureaus. Sole proprietors often find their personal and business credit is closely connected, but regardless of your business form, lenders often check both personal and business credit scores when you apply for business loans, credit lines or credit cards.
Unless you have a business credit history, lenders, vendors and others must rely on your personal credit score when you apply for credit. Without a personal credit score, you'll likely have trouble getting approved for business credit cards or trade credit, which can make it difficult to build a business credit history. Establishing a personal credit history is the first step to building your business credit.
Building business credit could take about a year. Until you've been in business for at least that long, commercial credit bureaus typically won't have enough data to generate a credit score for your business. Taking steps to ensure credit reporting agencies have as much information as possible may help speed the process. For example, you can manually submit trade credit accounts to Dun & Bradstreet if your vendors, suppliers or partners don't do so.
The Bottom Line
Both personal and business credit scores affect your ability to get business financing, so it's important to keep them both in good shape. Regularly check your business credit report to ensure the information is up to date and accurate. Experian's business credit monitoring service keeps tabs on your business credit report and score, giving you more time to spend growing your business.