How To Build Business Credit in 7 Steps
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Best Small Business Credit Cards.
Business credit helps indicate your business’s creditworthiness, which lenders and creditors use to determine your risk as a potential borrower. Scores typically range from 0 to 100 and are measured by the major business credit bureaus—Dun & Bradstreet, Equifax, and Experian. A good score can be the ticket to favorable terms on a business loan, a business credit card, or with a vendor. To build business credit, here are seven steps you should follow:
1. Establish Your Business Formally
Formalizing your business is a two-step process. First, establish a corporate structure for your business such as a limited liability company (LLC) or corporation. Second, obtain an employer identification number (EIN) from the IRS.
Determine Corporate Structure
When you incorporate your business or form an LLC, you separate your business and personal credit profile legally. This provides a level of protection from personal liability for the actions of the corporation. Some other advantages of incorporating your business include:
- Small business owners are protected from personal liability for company debt obligations
- Corporations are the best for companies that eventually want to go public
- Corporations can raise investment capital
- Transferring ownership is generally easier as a corporation
- Corporations aren’t dependent on the life of an individual and can continue indefinitely
- There are more opportunities to create tax benefits
Determining the best corporate structure for your business depends on whether you intend to remain small, seek investor capital and grow to scale, or have additional owners in your business and issue stock.
Obtain an EIN
Just as personal credit bureaus use your Social Security number for personal credit reports, business credit bureaus use an EIN for business credit reports. The EIN is essentially the Social Security number of a business. An EIN is required to apply for business loans, incorporate your business, open a business bank account, use with vendors or suppliers, and file business taxes.
You can apply for an EIN online in about 10 minutes. Once you receive your EIN, you can use it immediately for most business purposes. However, you’ll need to wait about two weeks to use your EIN to file taxes electronically.
2. Open a Business Bank Account
Every business needs a small business checking account for handling financial transactions. Opening a business bank account under your business’s legal name is required if you want to maintain the liability protections offered by LLCs. If business owners mix their business and personal finances, then a creditor has the right to say that company owners are liable for all company debts or damages.
While many checking accounts are similar, some banks don’t charge monthly account fees or make it easy to avoid them if you meet modest minimum balance requirements. These free business checking accounts can help keep traditional bank fees to a minimum, which allows you to keep more money in your business.
3. Obtain a DUNS Number
Dun & Bradstreet (D&B) offers a business credit score that’s used by many lenders. D&B collects public business and industry information, payment history, and financial performance information to generate three individual business credit scores. To gain access to these scores, you must first get a data universal numbering system (DUNS) number.
The DUNS number is a unique nine-digit identification number that’s used to create your business credit file, similar to how your Social Security number is associated with your personal credit reports. A DUNS number is also necessary if you decide to pursue a contract for work with the federal government.
You can apply for a DUNS number for free on D&B’s website or through a credit platform like Nav. DUNS will ask for the following information:
- Name of the organization
- Address
- Name of the owner or CEO
- Legal structure of the organization
- Year the organization was established
- Primary type of business
- Total number of full and part-time employees
Establishing business credit with D&B requires the DUNS number plus at least three trade references. Trade references, similar to employment references when you apply for a job, come from suppliers and creditors that you’ve done business with. You can get trade references by asking vendors you have a positive relationship with to report your payment activity to D&B.
It’s also possible that you already have a DUNS number if a vendor or supplier previously reported information to D&B. You can check to see if you already have a DUNS number by visiting the D&B website and searching for your company.
Equifax & Experian
In addition to D&B, Experian and Equifax monitor business credit. You don’t need to create an account or get trade references with Equifax or Experian. These bureaus look automatically at the secretary of state records for new business filings and other public records. They can score your business solely based on the demographic information in such records. Equifax also offers the ability for business owners to self-report company information, which can help keep your credit information up to date.
4. Obtain a Business Credit Card
Getting a small business credit card and paying the balance every month is a good way to build a strong payment history, which is one way to build your business credit. Many credit cards earn cash back and points-based rewards. If you have a good personal credit score―at least 670―then you may qualify for some of the best business credit cards. If you have no business credit history, there are many credit cards that will look strictly at your personal credit or your financials.
5. Establish a Line of Credit With Vendors & Lenders
While there’s a handful of information that can show up on your business credit report, trade lines can be some of the more important pieces of your credit history. A business trade line is a line of credit between a business and a vendor, which allows your business to pay its balance at a later date. Traditional and online lenders also offer business lines of credit that can be used for working capital and cash flow. A business owner can follow these steps to help them get a business line of credit.
If you want to build your business credit, open a line of credit with vendors and lenders that report to the business credit bureaus. You should have three to five lines of credit that report payment information. If you have a positive payment history, it’s important to ask your current suppliers and creditors if they report to the business credit agencies, as they aren’t required to do so. If they don’t, ask them if they can start reporting. Many vendors will agree because there’s no cost to report to the credit bureaus.
6. Pay Bills on Time
To build business credit, it’s crucial to repay all your creditors on time. Your payment history with vendors, lenders, and credit issuers is the most important factor when business credit bureaus calculate your business credit score. As with your personal credit score, late payments have a significant negative impact on your business credit score. And, a low credit score is the leading reason for credit denial. If your credit is damaged, consider opening a secured business credit card to help rebuild your score.
7. Monitor Your Credit Reports
Errors on your business credit report, such as misreported payment information, can skew your business credit. It’s a good rule of thumb to reconcile your business bank and credit card accounts with your trade lines, as this is where businesses will usually find errors or fraud on their accounts.
Getting a basic business credit report is free. These reports typically show monthly summaries of credit reports. Paid services will offer a more complete picture of your business credit; however, they may not be necessary if you’re merely checking to make sure your credit information is accurate. You can obtain your business credit reports and scores from D&B, Experian, and Equifax for free using Nav.
Each business credit reporting agency has its own procedures for errors on a business credit report. You can submit disputes electronically to D&B and Experian. To dispute items on an Equifax report, log into your account and contact customer service. With the right documentation, it usually takes about one month to fix an error on your business credit report.
FICO LiquidCredit SBSS
The FICO LiquidCredit SBSS is a mix of your personal and business credit score. FICO is unique because it isn’t technically one of the three major credit bureaus, but it still provides its own unique score.
FICO provides a business credit score based on information already collected by Dun & Bradstreet, Experian, and Equifax. Therefore, there’s nothing you need to do besides having your credit information looked at by the three main bureaus. All business owners need to focus on this score because it’s most commonly used when approving Small Business Administration (SBA) loans.
Bottom Line
As your business expands and grows, establishing and maintaining good business credit offers many benefits, such as low-interest business financing and favorable payment terms from suppliers. Using the steps outlined above, you can build a strong business credit score and set yourself up for success.
