How to Build Business Credit? What is Business Credit?

What is Business Credit?

Business credit is a crucial financial tool for your company. It helps you qualify for loans and other types of financing, builds relationships with vendors and other businesses, and aids in negotiations. Essentially, it reflects your business's financial health and reliability. Without business credit, it's challenging to secure loans, credit cards, vendor partnerships, and overall success as a small business.

Good credit is the goal, but bad credit can severely impact your ability to obtain financing and grow your business. Understanding and maintaining a high business credit score is essential for running a successful enterprise, yet many small business owners struggle with interpreting their credit scores.

How to Build Business Credit?

Starting a business is a critical step in building business credit. A good business credit score can benefit your company in various ways, from obtaining better loan terms to negotiating favorable deals with suppliers. However, building business credit doesn't happen overnight. It involves a step-by-step process, especially if your business has faced financial challenges in the past. This guide will take you through the essential steps to establish and strengthen your business credit.

Start a Business 

Starting a business involves the initial steps of legally forming your company, which can be a sole proprietorship, corporation, partnership, or limited liability company. It's crucial to choose a legal name and get a dedicated business phone number to boost your company's credibility with vendors and government authorities.

After these foundational legal steps, you can begin working with vendors who report to credit bureaus to establish your business credit file and kickstart the process of building credit. This not only makes your business official but also gets it recognized by business credit reporting agencies.

Business Registration and EIN Acquisition

To kickstart the process of building business credit, the initial steps involve registering your business. The specific requirements for this step can vary depending on your business structure and location. In some states, sole proprietors may not be required to register if they operate under their own name, although a local business license might still be necessary.

On the other hand, if you establish an LLC, registering your business is typically a mandatory step. Additionally, don't forget to apply for an employer identification number (EIN) from the IRS. While not directly linked to building business credit, an EIN is generally required by the IRS for most businesses and is an important part of the process.

Initiating Business Account

To begin the process of distinguishing your business finances from your personal ones, the first step is to create a dedicated business bank account. This specialized account not only aids in separating your finances but also facilitates the acquisition of a business credit card. Moreover, it lays the foundation for establishing a rapport with a banking institution, which could prove advantageous in the future when seeking a small business loan to expand your business endeavors.

Business Credit Card Application

Applying for a business credit card can be a valuable step in establishing your business credit. These cards don't solely rely on your business's credit history; instead, they consider your personal credit when determining approval. This means you can obtain a business credit card even if you don't have an established business credit profile. Starting early with a business credit card allows you to kickstart your credit-building journey, leading to a longer credit history and potentially a stronger credit score in the future.

Most small-business credit cards report your activity to business credit bureaus, which means that making on-time payments and keeping your credit utilization (the percentage of available credit you use) below 30% can positively impact your business credit score. However, be cautious as missed payments and delinquencies can have negative consequences on both your business and personal credit scores.

For business owners with poor personal credit, a secured business credit card is an option. These cards require a security deposit but can often be upgraded to an unsecured card with a good payment history.

Choosing Lenders Reporting to Business Credit Bureaus

If you're looking to boost your business credit, it's essential to choose lenders who report your payment history to business credit bureaus. While some lenders do report, not all of them do, so it's important to be selective.

Banks often report to business credit bureaus, but getting a business bank loan can be challenging, especially if your credit isn't excellent, or your business is relatively new. On the other hand, online business loans are usually more accessible for newer businesses or those with less-than-perfect credit. Many online small-business lenders, such as OnDeck, LendingClub, and Bluevine, report your financial data to business credit bureaus.

However, it's worth noting that merchant cash advance companies typically do not report to these bureaus. So, if you're considering a loan, it's a good practice to inquire with potential lenders whether they report your data to business credit bureaus. This information should be weighed along with other factors like the interest rate to make an informed decision.

Timely Payments to Creditors

Paying your bills on time is crucial for building a strong business credit score. Your payment history is a significant factor in determining your business creditworthiness, so it's important to make sure you meet your debt obligations promptly and in full.

In fact, making payments before the due date is even better. Companies like Dun & Bradstreet assign higher Paydex scores, which assess a business's payment history, to those that consistently pay their bills early. So, to boost your business credit profile, prioritize making early payments whenever possible.

Building Trade Lines with Suppliers

Building trade lines with your suppliers can be a valuable strategy for improving your business credit score. Many suppliers offer trade credit, which means you can pay for inventory and goods a few days or weeks after receiving them. This arrangement can positively impact your business credit, but it's essential to ensure that your supplier reports these payments to a business credit bureau.

You can establish trade lines with various suppliers, including smaller ones like your office supplies or water distributor. If these vendors don't report to a credit bureau, you can still include them as a trade reference on your account. Dun & Bradstreet, for example, will reach out to collect your trade data and add it to your business credit profile. This helps you build a stronger credit history for your business.

Preventing Judgments and Liens

Avoiding judgments, liens, and bankruptcy filings is crucial for maintaining a healthy business credit score. These negative marks can significantly harm your business's creditworthiness. Here's what you need to know:

• Liens: Unpaid taxes or business debts can lead to a lien, which gives creditors the legal right to seize your assets to cover the outstanding debt.
• Judgments: If your business fails to repay its debts, it may face a court ruling, or judgment, compelling you to settle the outstanding debt.
• Bankruptcy: Bankruptcy filings in your business's name can have long-lasting consequences. For example, bankruptcies can remain on your Experian credit report for up to 10 years, while tax liens, judgments, and collections can linger for nearly seven years.

To safeguard your business credit, prioritize paying your taxes and debts on time and in full. This proactive approach will help you avoid these detrimental marks on your business credit report.

Maintaining Accurate Information with Credit Bureaus

Maintaining accurate and up-to-date information with credit bureaus is crucial for the health of your business credit score. Negative entries such as judgments, liens, or bankruptcy filings in your business's name can have severe repercussions. For instance, unpaid taxes or business debts can lead to a lien, which grants creditors the legal right to seize your assets to settle the debt.

Additionally, outstanding debts may result in a judgment against your business, compelling you to address the unpaid amounts. These adverse marks can have long-lasting consequences, with bankruptcies remaining on your Experian credit score for up to a decade, and tax liens, judgments, and collections affecting your credit for nearly seven years.

To safeguard your business credit, it's essential to make timely payments and take proactive measures to prevent judgments, liens, or bankruptcies. By maintaining accurate financial records and promptly addressing any financial issues, you can ensure that your business credit remains in good standing.

Why is Business Credit So Important?

Business credit is of paramount importance for small business owners as it plays a pivotal role in shaping the financial reputation and trustworthiness of your company. Much like personal credit, business credit influences critical decisions regarding funding and financial partnerships. Here are ten compelling statistics that underscore the significance of establishing and maintaining good business credit:

• Global Business Reliance: Dun & Bradstreet states that 90% of Fortune 500™ companies worldwide depend on their data, insights, and analytics for various business operations and growth.
• Credit Reporting Requests: In a mere six months, Dun & Bradstreet received 45 million business credit report requests, while Equifax Commercial received 35 million requests in the first half of 2013.
• Personal Credit Card Use: A staggering 46% of small businesses resort to using personal credit cards, often failing to distinguish between business and personal expenses.
• Loan Denials: According to the NSBA Small Business Access to Capital Study, business credit contributes to 20% of small business loan denials.
• Access to Funding: Approximately 27% of businesses have reported challenges in securing the necessary funding, hindering their growth prospects.
• Acceptable Score Threshold: Many lenders consider a business credit score of 75 as "acceptable," making it challenging for those with lower scores to secure small business loans.
• Lack of Awareness: The Nav American Dream Gap Survey in 2015 revealed that 45% of small business owners were unaware of their business credit score, 72% didn't know where to access this information, and 82% were uncertain about how to interpret their scores.
• Credit Score Improvement Timeframe: On average, it takes 12-18 months for a business to enhance its credit score.
• Financial Backbone: Small business credit cards account for a significant portion of spending, approximately $430 billion, highlighting their integral role in the business financial landscape.
• Funding Sources: One in three small business owners borrows money from family and friends, while 75% of young firms rely on bank loans and business credit for financing.

What are the Benefits of Fair Business Credit?

Having a solid business credit score offers several valuable benefits that can significantly impact the success and financial stability of your business:

Swift Loan Approval: Lenders often use your business credit score as an initial filter when assessing loan applications. While a high score doesn't guarantee automatic approval, it does create a favorable impression with lenders, increasing your chances of getting approved.

Better Loan Terms: A high business credit score reflects a history of responsible financial behavior, assuring lenders of your ability to repay loans on time. Consequently, lenders are more likely to offer you favorable loan terms, including lower interest rates, flexible repayment structures, and higher loan amounts. Conversely, a low credit score may result in smaller loans, stricter terms, and higher interest rates to mitigate the perceived risk.

Unsecured Loans: With a good credit score, your business may qualify for unsecured loans, eliminating the need for collateral. In contrast, businesses with poor credit scores may be limited to secured loans, requiring valuable assets as collateral. This means you won't have to risk personal or business assets like your office premises or machinery to secure a loan.

Enhanced Reputation: When engaging with suppliers, vendors, or potential business partners, they may conduct their own due diligence to evaluate the reliability of your company. Having a strong business credit score can boost your reputation and instill confidence in others when considering business relationships and deals.

How to Increase Business Credit Without Using Personal Credit?

Increasing your business credit without relying on your personal credit involves several steps. First, establish your business as a separate legal entity, like an LLC or corporation, to create a clear distinction between personal and business finances. Next, obtain an Employer Identification Number (EIN) from the IRS, which is essential for building business credit.

Open a dedicated business bank account and apply for a business credit card, ensuring that these financial accounts are in your business's name. Make prompt payments to vendors and creditors, as this demonstrates your business's creditworthiness.

Additionally, seek out lenders and credit issuers that report to business credit bureaus to establish a positive credit history. By following these steps and maintaining a strong business credit profile, you can increase your business credit without relying on your personal credit.

How to Establish Business Credit for the First Time?

To establish business credit for the first time, you'll need to apply for business loans and credit cards that don't demand a high credit score or an extensive credit history. Here are some potential options:

• Secured Business Loans: These loans require collateral, which could be business or personal property. If you can't repay the loan, the lender can claim the collateral.
• Secured Business Credit Cards: These credit cards require a deposit upfront, but some offer refunds after a specific period of on-time payments.
• Online Lenders: Online lenders often have lower approval requirements, making it easier for new businesses to qualify for loans.
• Finance Companies: Some finance companies may ask for collateral, but they are another option to explore.

Many small business owners prefer online lenders due to their higher approval rates. Small banks and finance companies, including non-bank lenders like mortgage firms, equipment dealers, insurance companies, and auto finance companies, are also worth considering.