How to Build Business Credit [Step-By-Step Instructions]

Fact-checked

Business credit is just as important as personal credit. You can obtain many benefits if you have good business credit. If you’re a business owner and wish to be on the receiving end of the benefits of a good business credit score, you should inform yourself how to build business credit. This article addresses the benefits of building good business credit.

What Is Business Credit?

Business credit is a loan or line of credit issued to companies for business purposes, allowing business owners to borrow money to purchase products or services necessary for business operations. Lenders and creditors issue loans to businesses based on a trust system—credit issuers trust that companies will make regular payments in the future.

To get business credit, a business needs to have a good credit score. Business credit scores are based on the same principle as personal scores. A company is assigned a numerical value that represents its creditworthiness. For example, one type of credit score your business can be given is a FICO® score. The higher the score, the more likely the company will qualify for credit at favorable interest rates.

The business credit report is evaluated by banks, insurance companies, suppliers, vendors, and other organizations in some way connected to your business or its operations. So, the report must show good numbers. In the same way your personal credit score reflects your reliability as a borrower, a business score reflects that your business is a reliable borrower.

How to Build Business Credit

Business credit is determined by business credit reporting agencies. The three major agencies include Dun & Bradstreet®, Experian®, and Equifax®. All of these agencies collect information from all your business associates and public records, which they later input into an algorithm that determines your business credit score.

Business scores typically range from 0 to 100. But this is different from calculating a personal score since each agency has its own criteria and methods for determining your company’s score. For example, suppose you’re uncertain as to how to set up business credit. In this case, you should keep in mind that your company is guaranteed to have a good score if it doesn’t accrue debt or makes all of its debt payments on time, shows good credit utilization, and doesn’t have any legal trouble.

NOTE: One of the main requirements for registering a business entity is having a business plan. You can draw up this plan yourself, hire a professional, or utilize high-quality business plan software

Benefits of Building Business Credit

Good business credit can provide various additional benefits for your company while proving to credit issuers and any other collaborators that your company is a credible, separate business entity. Note six benefits (below) of building business credit.

Approval for Leases and Loans

Getting business credit means that you’ll be able to obtain any future loans and property leases with much less difficulty. Once the lender sees your firmly established good credit, they won’t have any doubts about approving you for a loan.

Lower Interest Rates

An excellent benefit of good business credit is a lower interest rate, which is essential when applying for credit for a small business. Once credit issuers see that your business is in good standing and that it’s likely you’ll be making on-time payments, they will lower their interest rates and give more flexible payment terms to attract you as a client.

Opening Credit Cards Without Personal Guarantee

If you build business credit, then you’ll be able to apply for loans and credit cards without having to provide a personal guarantee—meaning that your personal assets will be protected if your business fails to make a payment.

Insurance Companies

Insurance is essential for your business. Before extending an insurance policy, an insurance company looks at your business’ score to determine the amount of coverage they can grant you. If your company reports a higher score on the insurance application, the company will give you more extensive coverage.

Suppliers

Besides providing better options for business financing, building business credit can improve your credit terms with suppliers. If the supplier knows that your company is in good condition and capable of repaying its debts, it’s more likely that they’ll give you good net terms and allow you to defer payments and purchase on credit.

Achieving this for your business is a great advantage. You can sell the merchandise provided by your supplier before paying them—so you’ll end up with a clean slate with the supplier and with a profit.

Business Expansion

A new business aims to grow and expand. But this is often slowed down due to the funding ability of the company. If you manage to get business credit for the company, you’ll be able to obtain a loan for expansion and buy any necessary inventory, equipment, or even new facilities.

NOTE: LLCs are one of the most popular business structures in the US. But if you’re an entrepreneur, you may be in doubt as to how to form an LLC. In this case, you can turn to the most reliable LLC service that can also find you a great registered agent

Key Takeaways

Business credit allows the ability to acquire goods and services and defer payments for these later.
Good business credit equals benefits for the business, including better access to loans and lower interest rates, no requirements for personal guarantees, better insurance, and better collaboration with service providers.
Establishing business credit depends on the proper business structure, getting an EIN, establishing good relationships with your associates, and making timely payments.
The essential criterion for acquiring good business credit includes on-time payments, which shows that your company is responsible and reliable.

How to Build Business Credit

Having good credit can do a lot for your business, but before you reap all the benefits, you need to ensure that you’re undertaking all the proper steps to business credit building. Consider these seven essential steps.

Choose the Best Business Structure

Before you register a business, choose a type of business entity for it. Ensure that you select the correct entity for your business’ specific operations since the company will need to abide by the laws regarding your kind of business and pay taxes accordingly.

After choosing the business structure, you can register the business’s legal name and open a business checking account. Recommended business structures for establishing business credit include a Limited Liability Company (LLC), a Limited Liability Partnership (LLP),  an S-corporation or C-corporation.

Check and Monitor Your Credit

Business owners have often found mistakes in their company’s credit report. Therefore, it’s essential to pay close attention to all the credit information regarding your business since your associates can access it and get a false impression about your company’s financial ability. If you do notice an error in your credit history, you need to file a complaint with the reporting agency and insist they correct it.

Establish Good Credit Relationships With Vendors and Suppliers

If you establish business credit with those supplying goods or services, you won’t need to pay for everything upfront, but you’ll be able to defer your payments.

With good credit, you can secure payment terms (net-60 or net-90) with a select number of vendors and suppliers and establish a good credit history with them. Since vendors and other service providers aren’t required by law to report to credit bureaus and agencies, ensure that you have a business deal, at least with several of those that report your financial activity.

Obtain an EIN

All registered businesses must obtain a Federal Tax Identification Number (EIN), primarily for taxation purposes. You’ll also need this number if you want to change the tax filing status of your company, make business contracts, or open a business bank account.

If you’re wondering how to get business credit with the help of your EIN, first ensure you know the difference between TIN and EIN and use them properly.

Apply for a Credit Card

One solution as to how to obtain business credit is to apply for a business credit card. A diversity of accounts can be beneficial for your credit history. But before settling on a credit card provider, make sure they report to credit agencies and that your payment record will be taken into consideration.

If you can responsibly manage your finances, opening more than one credit card is a good idea. But you need to be careful not to utilize all the credit that you’ve been granted, as it can quickly lead to debt accumulation. So if you’ve decided on getting a business credit card, don’t forget to look into the most popular credit cards for LLC and these great offers of small business credit cards.

Pay Everything on Time

If you’re still unsure how to start business credit building with the help of a business credit card, you need to remember an essential rule: pay on time. Paying your credit card and other bills on time will show credit agencies and bureaus that your business is a reliable entity. History of late or delinquent payments will bring down your business credit scores and negatively influence your credit report, making it more difficult for you to obtain loans and credit cards in the future.

Separate Personal and Business Expenses

When opening business bank accounts and applying for a line of credit, be sure to open a business credit file in the company’s name, thereby providing financial separation between your business and yourself. Use money only from your business accounts for business expenses. Don’t spend your own money on business-related affairs, which will make it easier to manage your taxes.

For these purposes, it’s inadvisable to start a sole proprietorship or general partnership. Even though they may be the most straightforward business entities to create and manage, they provide no financial separation between the owner and business. In addition, if you’re an owner of one of these two business entities, you won’t be able to get business credit with just an EIN. Instead, you’ll be required to provide your Social Security Number, which will reflect on your personal credit.

Obtain a D-U-N-S Number

If you wish to build business credit fast, getting a D-U-N-S Number is a good idea. This unique nine-digit number identifies businesses on a location-specific basis and is available for free at Dun & Bradstreet®. Prospective business associates or credit issuers might decide to use this number to determine the financial state of your company. So it’s best if you obtain one before applying for a loan.

Other Vital Answers

Even after covering the basics of building business credit, you might be left with some unanswered questions about your specific business situation.

How to Build Business Credit Fast

If you’re set on building your business’ credit in a short time, you need to go through all the required steps:

  1. Establish a business entity;
  2. Open a bank account;
  3. Apply for a credit card;
  4. Make regular payments.

You can then build business credit in 30 days. But it’s crucial to maintain the same level of responsibility as time goes by since credit scores can be quickly diminished.

How to Build Business Credit Without Using Personal Credit

Once you’ve established your business and have an EIN, you can apply for loans and lines of credit without listing your SSN, meaning that your personal credit won’t play a role in the process of building your business credit.

How to Build Business Credit With Bad Personal Credit

Even if your personal credit scores are not in the most remarkable shape, you have no reason to worry. Once you’ve obtained an EIN for your business, the IRS won’t look into your personal credit history, and you’ll be able to apply for business credit, regardless of whether your personal score is credible or not.

How to Build Business Credit for an LLC

If your LLC is taxed as a business entity—not as a sole proprietorship—building credit for it is the same as building credit for all other types of business entities.

NOTE: Some credit issuers require personal guarantees. Therefore, business owners need to vouch that they will be personally responsible for settling any debts if they cannot repay them. 

Conclusion

How does business credit work? First, your business needs to build good credit and have at its disposal all the benefits that come with it. Second, even if you don’t now need a loan, you don’t know what the future holds. So having good business credit will come in handy at some point.

FAQ

How can I build my business credit fast?

The fastest way to build business credit is to pay all your bills and business expenses on time. Then you can apply for small loans or lines of credit and continue to make regular payments, which will establish good credit for your business in a short time.

How does an LLC build credit?

LLCs build credit just like all other business entities—unless they’re taxed as sole proprietorships, in which case, the company’s credit scores are actually the owner’s personal scores.

How long does it take to build good business credit?

Some experts state that it takes at least three years to establish business credit. But some creditors require only one year of regular payments as proof of good credit. This is not to say that you couldn’t establish good credit faster if you set your mind to it.

How do I build credit with an EIN?

How to build business credit with an EIN is a common question. You should use this number on all official documents and loan and credit card applications. In this way, all business credit will be attributed to your business.

ABOUT AUTHOR

I’m an entrepreneur by profession and an artist by passion. I do business to pay the bills and make music to bring the thrills. Thanks to a bachelor in Business Administration, I'm well-versed in all things business. Owning a construction company certainly helps, too, but it also brings out my love for building and home protection.

Latest from Noel

How to Create Your Own Email Domain Free of Charge How to Trademark a Company Name [Full Guide for 2022] Best Father’s Day Gifts [List of 31 Gift Ideas for 2022] Is Dropshipping Worth It? [Ultimate Guide for 2022]

Leave a Reply