Q: How do I establish business credit for my company?
A: Establishing business credit requires consistency over time. Start by forming a business entity, obtaining an EIN, and opening a business bank account. Then open a line of credit in your business name. A business credit card is one of the easiest starting points. Working with vendors and suppliers who report to business credit bureaus also builds your profile. The most important factor throughout: pay every bill in full and on time.
Why Your Business Credit Score Is the Key to Growth
Just like people have credit scores, businesses do as well. Business credit is a company’s creditworthiness: its ability to qualify for financing. Building your business credit is important because banks and financial institutions look at it when deciding whether to give your company funding, at what rate, and under what terms.
The better your business credit, the better the chances your company has of accessing necessary financing when it matters most. If you are a company owner wondering how to build business credit, this guide covers the importance of business credit and the steps to establish and grow it.
Why Do I Need to Establish Business Credit?
Building business credit is an important part of starting and growing a business. Studies have found that the number one reason new businesses fail is that they run out of cash. So even if you do not need financing in the early stages, there may come a point when having access to additional funds can make or break your business.
A strong business credit score not only makes your business a good candidate for loans, it also offers a range of additional benefits:
- Get lower interest rates
- Qualify for lower insurance premiums
- Secure better terms from lenders and suppliers
As research has noted, small firms have historically faced significant difficulties in accessing funding for creditworthy projects due to a lack of credible information about them by potential providers of funds. A lack of credit can create just as many challenges as having bad credit.
Benefits of High Business Credit Scores
Small businesses can greatly benefit from building their credit score. It is not just for large companies. Thinking about your business credit profile is important regardless of how big or small your company is.
Qualify for Loans
Having good business credit makes it easier to qualify for loans. Even though you can apply for a loan as an individual and use it for your business, there are distinct advantages to qualifying for a business loan:
- Access to more capital
- Better interest rates
- Better loan terms
If you are hoping to expand your business and do not have the necessary capital, a high business credit score can help you secure a loan to grow your company.
Good Business Credit Protects Your Personal Finances
Building a strong credit profile for your business allows you to keep personal and business finances separate. Having good business credit means you are less likely to use personal assets for collateral, which limits your personal exposure and risk.
An additional benefit: having a business credit score means your personal credit will not be impacted by any financial difficulties your business may encounter.
Better Terms from Lenders and Suppliers
If you have a strong business credit score, financial institutions will not only be more willing to give you funds, they will also be more likely to offer better terms and rates. A good score means your business is more likely to be approved for a loan with favorable rates.
A strong business credit score also makes it easier to negotiate better terms with suppliers. If you need to buy equipment or increase inventory, suppliers are more likely to allow you to purchase on credit rather than requiring prepayment. A strong credit score signals that you are good for the money.
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How to Establish Business Credit
Establishing business credit is straightforward, but it takes time and planning. The following steps will walk you through building your business credit score from the ground up.
- Form a Business Entity
- Obtain an Employer Identification Number (EIN)
- Open a Business Bank Account
- Maintain Good Credit Lines with Suppliers
- Always Make Payments on Time
If you operate as a sole proprietor, your business and personal credit and assets are legally attached to one another, exposing you to personal risk. Registering your business as a Limited Liability Company (LLC), partnership, or corporation legally separates your business and personal credit and assets. This creates a business entity that is treated separately from you as an individual when entering contracts or applying for loans.
When you incorporate your company, you will be required to create an EIN. Think of your business EIN as your company’s social security number. You will use it when opening a bank account, filing tax returns, applying for business permits and licenses, and applying for business credit.
If you plan to apply for credit now or in the future, you will need a business bank account. Your company’s bank will be used as a reference on credit applications. Having a business checking account also makes it easier to apply for a business credit card from the same bank, and it helps keep personal and business expenses cleanly separated.
When you buy supplies, equipment, or inventory, make those purchases on credit when vendors are willing. The payments you make will be reported to business credit bureaus.
Pro tip: aim to work with vendors and suppliers that report to business credit reporting agencies. This is one of the most efficient ways to build your profile early.
If you want to establish a high business credit score, you need to pay your company bills in full and on time. Payments made on time and for the full amount show financial institutions and lenders that you manage your finances responsibly, which is directly reflected in your business credit score. Late payments and partial payments will negatively impact your score.
NEXT STEPS: Learn how a virtual address supports LLC registration and business credit
How to Build Business Credit
Establishing business credit is the foundation. Building and maintaining it over time requires ongoing habits and strategies.
1. Utilize Debt Strategically and Use Credit Responsibly
When you borrow and repay funds in a timely manner, you are actively building your business credit. A business credit card serves two purposes: it provides access to funds you may not have immediately, and it establishes a line of credit that functions as an effective tool for building your credit profile.
- The best approach is to use your business credit card and pay off the balance in full each month.
- Monitor your credit utilization. Experts typically recommend using 30% or less of your credit limit to improve your chances of loan approval.
2. Pay Your Bills on Time or Early
The importance of on-time payments cannot be overstated. Banks and lenders look at how quickly you pay suppliers and whether payments are consistently on time when reviewing credit applications. Credit reporting agencies also use payment timing as a primary signal when calculating your business credit score.
Pro tip: paying early may earn additional points. Paying ahead of schedule can help build your credit score faster than waiting until the due date.
3. Monitor Your Credit Regularly
Regularly monitoring your business credit is essential. There are multiple business credit reporting agencies, and you need to keep an eye on all your company credit files to ensure accuracy.
The major business credit reporting agencies to monitor include:
- CreditSafe business credit reports and scores
- Equifax business credit reports and scores
- Experian business credit reports and scores
Regularly check your business profiles to spot any problems or irregularities that need correcting. Ensure the information agencies have on file is current. If you notice outdated or incorrect information, contact the agency directly so corrections can be made.
4. Focus on Creditworthiness for the Long Term
A huge part of building your business credit depends on your financial history. Establishing a robust credit profile takes consistent and responsible use of credit lines over a long period. The earlier you start, the better.
Factors that affect your business credit score:
- How long you have been in business
- Your annual business revenue and whether it is growing year over year
- Any business-owned assets such as real estate, intellectual property, or equipment
- Business credit and loan history
- Public records
- Company size
- Your line of work and business industry
While all these factors are considered, payment history is the most influential. If your company pays bills in full and on time, it will generally maintain a good credit score.
Factors that negatively impact business credit score:
- Unpaid bills
- Late payments
- Taking on too much debt
- Late filings of tax returns
- Change of business ownership
- Switching banks
What Is a Good Business Credit Score?
Each credit reporting agency uses a different scoring range and methodology. The table below outlines the major bureaus and their respective scoring systems.
| Credit Bureau | Score Range | Scale | Score Name |
|---|---|---|---|
| CreditSafe | 0 – 100 | Higher = better | CreditSafe Business Score |
| Experian | 0 – 100 | Higher = better | Intelliscore℠ Plus |
| FICO | 0 – 300 | Higher = better | FICO® LiquidCredit® SBSS℠ |
| Equifax | 224 – 580 | Higher = better | Business Delinquency Risk Score |
A higher number on each scale indicates a lower risk of late payment and a stronger likelihood of creditworthiness. Because each reporting agency uses different scales, it is important to monitor all your business credit profiles regularly.
Intelliscore℠ Plus Risk Class Breakdown (Experian)
| Score Range | Score Description |
|---|---|
| 76 – 100 | Low |
| 51 – 75 | Medium |
| 26 – 50 | Medium |
| 11 – 25 | High-Medium |
| 1 – 10 | High |
FICO® LiquidCredit® Small Business Scoring Service℠
| Score | Description |
|---|---|
| 140 | Minimum score to pass the SBA pre-screen process |
| 160 – 165 | Minimum score required by most SBA lenders |
Tips and Resources to Build Your Business Credit
Form a Business Entity
When thinking about how to build your business credit score, start by registering your business as an LLC, corporation, or partnership. This helps maintain your corporate veil by keeping your personal and business financial assets and liabilities legally separate.
For remotely operating businesses and work-from-home entrepreneurs: once filed, your business details become part of the public record. It is strongly advisable to safeguard your home address and personal phone number to maintain privacy and preserve that separation between personal and business identity.
Register with a Credit Reporting Agency
Once you have registered your business and opened a business bank account, consider registering with a major credit bureau. Registering directly can help ensure your credit activity is captured and reported accurately. The primary business credit reporting agencies to register with include:
- CreditSafe business credit reports and scores
- Equifax business credit reports and scores
- Experian business credit reports and scores
Prioritize Monitoring Your Business Credit Scores
To ensure that financial institutions have access to correct and up-to-date information about your business, make a habit of regularly checking your business credit profiles across all reporting agencies.
Monitor how your score changes over time and catch any irregularities before they become larger problems. Your business credit score represents your financial reputation. It dictates how much you can borrow, the interest rates you receive, and the terms suppliers and vendors are willing to offer. Protect that score across all credit reporting agencies.
Consider a Commercial Business Address
A commercial business address supports your business credit profile in several practical ways:
- Required to register and incorporate your company
- Needed to open a business bank account
- Used to open a business credit file
- Necessary to set up bills and utilities in your company’s name
When forming your business entity and registering for a business license, you will be required to name a business address. That address becomes public record. If you do not operate from a traditional brick-and-mortar location, this can introduce privacy and security concerns.
It is also worth noting that most financial institutions do not accept P.O. Box addresses as a valid business address when opening a business bank account, forming a business entity, or applying for a business license.
The solution: A virtual office address. Virtual office addresses are verifiable, physical addresses that can be used to form your business entity and register all necessary business licenses. They give your business credibility, can be used to apply for business licenses and permits, help separate your personal information from your business information, and offer an extra degree of privacy and security.
NEXT STEPS: Get a virtual office address for your business
Everything You Need to Grow Your Business
That’s what you get with a custom
Virtual Office Plan from Alliance
Select:
- Virtual Office
- Live Receptionist
- Virtual Phone
- Meeting Rooms
- Coworking
- Full Time Office
Building Business Credit Takes Consistency — Start Now
The process of establishing and building business credit is not complicated, but it requires patience and consistency over time. There are different steps you can take to build your company’s credit score, but they all trace back to one foundational habit: pay your bills on time.
Start forming your business entity, separate your personal and business finances, and build relationships with vendors and suppliers who report to credit agencies. The earlier you begin, the more credit history you will have when you need financing most.
Further Reading
