How to Establish and Build Business Credit
Having good business credit is important when it comes to securing financing and negotiating favorable terms with suppliers. Just like your personal credit, lenders and other companies will check your business’s credit to decide whether to work with your company and, if so, under what terms.
While business credit serves much the same function as your personal credit, it doesn’t exactly work the same way. The credit reports, scores, bureaus and reportable data all function differently. That’s why many small business owners struggle with learning how to build business credit. Once you understand the basics of how it works, though, you can more confidently chart a path for the long-term success of your business.
- Business credit takes into account different factors than personal credit.
- It can take three to six months to first establish business credit, and six to 12 months to build a strong business credit score.
- Building good business credit is important for all small business owners, even if you don’t plan on taking on business debts.
1. Register your business as a separate entity
Many business owners start out as sole proprietors. It’s the default option if you don’t elect to create a formal business structure. Sole proprietors often have a more difficult time accessing credit because, in the eyes of the law (and thus, lenders), there’s no separation between the business owner as a person and the business itself. That makes you more reliant on your personal credit.
Once you’re more serious about running a business, it’s typically a good idea to formally incorporate as a Limited Liability Company (LLC) or corporation and register with the state and federal governments. Setting up a separate business entity is a bit more work, but it allows you to:
- Build business credit
- Simplify tax preparation
- Get a clearer picture of your business finances
- Get more FDIC coverage for business bank deposits
- Protect your personal finances from business liabilities
- Make bookkeeping easier, especially when paying yourself or your suppliers
2. Get an Employer Identification Number
An Employer Identification Number (EIN) is like a Social Security number (SSN) for your business. Sole proprietors don’t necessarily need an EIN, although you can still get one if you wish. An EIN is required for other businesses, however, such as LLCs, corporations or partnerships.
Whether you need it or not, an EIN lets you further separate your business from your personal finances. It lets you conduct business in your company’s name rather than your own personal name. Therefore, you’ll need an EIN to establish business credit. Plus, most banks require an EIN to open a small business bank account. This also helps you separate your business from your personal finances more easily.
Getting an EIN is a quick and easy process. You can request an EIN for free on the IRS website, and it only takes a few minutes.
3. Apply for a DUNS number
Credit bureaus compile your data into a credit report for other companies to see, just like with your personal credit. Except when it comes to your business, there’s a different credit bureau that comes more into play: Dun & Bradstreet (or D&B, as it’s commonly abbreviated).
This credit bureau uses its own proprietary DUNS number (Data Universal Numbering System), not your EIN, to generate a business credit report. It’s possible that your business already has a DUNS number if you’ve worked with other companies or agencies that have reported your payments to D&B.
You can check whether your business already has a DUNS number on its website. If not, you can request a DUNS number online. It’s free and can take up to 30 days, unless you pay a fee to expedite it.
You also have business credit scores with Equifax, Experian and FICO, but you don’t need to apply to get a number with those bureaus.
An EIN is created by the government, and a DUNS number is created by a private credit company. It’s not an either/or — if you’re looking to build business credit, you’ll need both. If your business contracts with the federal government, you’ll also need a Unique Entity ID (UEI) in order to apply for contracts.
4. Establish tradelines with suppliers
A tradeline is any account listed on your credit report. For small businesses, this typically refers to your accounts with vendors who report to Dun and Bradstreet – though it can also include loans and revolving credit accounts.
In order to generate your D&B PAYDEX Score, you’ll need at least two separate suppliers who regularly report your payment information to D&B. The PAYDEX Score ranges from 0 to 100. Anything above 80 shows that your business has a good history of paying on time.
Small businesses can often negotiate payment terms for goods and services with their suppliers and vendors, and a good PAYDEX score can help you negotiate better terms. Essentially, having accounts with vendors who report to D&B can help raise your score, which can help you get better terms on future accounts.
A common trade credit arrangement is a net-30 format, where a supplier might set a due date for 30 days after submitting an invoice. If you have good business credit, you can often negotiate even longer terms with your suppliers, which can help smooth out your business’s cash flow.
You don’t need to pay to report tradelines on your business credit profile, particularly if your suppliers and vendors already do so, or if establishing trade credit isn’t a priority for you. But if it is, and if you don’t have at least two suppliers who report your payment information, then it can be worth investigating further.
Before you pay for anything, though, make sure to ask your existing suppliers whether they’d be willing to consider doing so. Some paid services can help you add tradelines to your business credit report, but you’ll need to carefully assess your business goals to see whether it’s worth the cost.
5. Make early payments
Paying on time can help you grow both your personal and business credit. This helps you avoid making late payments, which can eventually turn into credit-destroying defaults and liens. But unlike personal credit, paying early — before your invoice is due — can help your business credit score grow even further.
If you always pay your business bills on the exact payment due date, you can expect a D&B PAYDEX Score of 80 — the dividing line between good and bad, essentially. But if you always pay your business bills on the day you receive your invoice with net-30 terms (i.e., if you pay 30 days early), you can more easily achieve a 100 PAYDEX Score, which is the highest (and best) score possible.
For a payment to count, your vendor must actually report it to the business credit bureaus. That’s extra unpaid work, and so many businesses don’t bother, particularly if they don’t have a lot of employees. In fact, only about 2% of businesses actually do report your company’s payments, according to Experian.
You can circumvent this issue by asking current or potential vendors upfront whether they report to the credit bureaus and prioritizing your business relationships with these companies instead.
6. Open a business credit card
Business credit cards are often easier to get than full-fledged business loans and lines of credit, and while they’re not the best choice for large-scale business investments, they have many other advantages, including helping you build business credit if you consistently pay your balance in full on time.
Business credit cards also offer a handy way for you and your employees to pay for smaller purchases, such as inventory and equipment. Your business can earn rewards on those purchases, too. It’s best to pay off credit cards in full each month if your business has sufficient cash flow, but if not, you can pay finance charges to spread repayment out over time.
As with your personal credit, keep in mind that carrying a higher balance on your business credit card can negatively impact your business credit.
7. Monitor your credit reports
It’s important for small business owners to keep tabs on their credit profiles for several reasons. Aside from monitoring any credit-building efforts on your part, checking your business credit report regularly can also help you identify reporting errors or even flag outright fraud before it becomes a larger problem.
In the U.S., there are three main small business credit bureaus, each with its own credit report costs:
- Equifax: $49.95 (one-time fee)
- Experian: $49.95 (one-time fee) to $1,495/year
- Dun & Bradstreet: $0 to $149/month
Some third-party small business credit monitoring services, such as Nav, offer free access to small business credit summaries, with paid options for more extensive data.
If you find an error on your small business credit report, it’s important to investigate further. Reach out to the company that reported the information, as well as the credit bureau itself if needed, to fix the error.
Your personal credit score and your business credit score operate independently of each other, although most small business lenders will check both.
That means that, as a small business owner, you need to focus on building good credit on both sides of the spectrum. Having great business credit may not be enough to overcome a bad personal credit score, for example, if you’re applying for an important business loan to expand your operations.
You can check your personal credit report for free on AnnualCreditReport.com. You can also check your personal credit score through many third-party services or from your own bank and lenders.
What is a good business credit score?
Business credit score ranges can vary based on the reporting credit bureau. Here’s a breakdown of the typical ranges and what they mean:
- Dun & Bradstreet: As one of the most common methods for evaluating a business’s credit profile, Dun & Bradstreet PAYDEX scores range from one to 100, with 80 or higher considered a good score.
- Experian Business: Experian Intelliscore’s range goes from one to 100, with 50-75 considered a fair score and a score of 76 or higher considered good.
- Equifax Business: Equifax’s Credit Risk Scores range from 0 to 999, with no specified numbers relating to fair or good. Like the others, it’s best to aim high.
- FICO Small Business Scoring Service: The FICO Small Business Scoring Service (SBSS) is becoming more popular, with scores ranging from zero to 300. A good score is anything over 180. Note that the FICO SBSS does consider your personal FICO Score when calculating this score.
Common business credit myths
Business credit works differently from personal credit, leaving many small business owners perplexed about how to build business credit. Let’s set the record straight with some myths and facts. [Formatting note: Can we do this myth/fact formatting in the new WPM system? Remove “Fact” if not]
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Myth: An EIN establishes your business credit.
- Fact: An EIN is just a business version of an SSN. You can use it to start building business credit, but on its own, it doesn’t do anything.
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Myth: Your business credit doesn’t impact your personal credit.
- Fact: Not directly, at least. But if you pay late or default on a business debt that requires a personal guarantee (many of them do), it can show up on your personal credit report, too.
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Myth: You don’t need business credit if you’re not applying for loans.
- Fact: No one knows the future, and by building good business credit today, you’re giving yourself more options for tomorrow. Plus, monitoring business credit helps you identify cases of identity theft before they become a problem.
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Myth: Credit bureaus need your permission to show someone your business credit report.
- Fact: Anyone who pays the credit report fee can view your small business credit report — a stark difference compared to personal credit reports.
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Myth: You need good personal credit to build good business credit.
- Fact: The skills that help you build a good personal credit score can also help when it comes to building small business credit, but they’re not mutually exclusive. It’s possible for them to differ.
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