Q: How do I establish business credit for my company?
A: Establishing business credit is simple, but it requires consistency over time. To start, you’ll need to open a line of credit in your business’ name. One of the easiest lines of credit to obtain is a business credit card, but working with suppliers and vendors who report to credit agencies will count toward your credit profile as well. There are a few steps you need to take before applying for a business credit card such as: forming your business entity and opening a business bank account – as we detail in this guide.
Just like people have credit scores, businesses do as well.
Business credit is a company’s creditworthiness, meaning it’s a business’s ability to qualify for financing.
Building your business credit is important because it’s what banks and other financial institutions will look at when determining whether to give your company financing or not.
The better your business credit, the better the chances your company has of accessing the necessary funding. If you are a company owner and are wondering how to build business credit, you have come to the right place.
This guide will provide you with information about the importance of business credit and tips on how to build business credit.
Here are a few important takeaways we discuss in the guide:
- The number one reason why new businesses fail is that they run out of cash. Establishing and building business credit can help ensure new companies can gain access to loans to finance their operations and or growth plans.
- Good business credit can help companies get lower interest rates, negotiate lower insurance premiums, and negotiate better loan terms.
- The most important element to establishing and building a good business credit score is to make payments in full and on time.
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 why new businesses fail is that they run out of cash.
So, even if you don’t need financing in the early stages, there may come a point in time when having access to additional funds can make or break your business.
Having a strong business credit score will facilitate access to financing options in the future.
A strong business credit score not only makes your business a good candidate to lend money to, but it also offers additional business benefits:
- Get lower interest rates.
- Get lower insurance premiums.
- Secure better terms.
In fact, “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 for your business as having bad credit.
Benefits of High Business Credit Scores
Small businesses can greatly benefit from building their credit score. It’s not just for the big guys. Thinking about your business’ credit profile is important regardless of how big or small your company is.
Even if you are running a one-man show, having a good business credit score is important for a variety of reasons.
Let’s take a look…
Qualify for Loans
This is probably one of the biggest advantages of business credit for entrepreneurs and small businesses. Having good business credit will make it easier for you and your company to qualify for loans.
Even though you can apply for a loan as an individual and use it for your new business venture, there are a few benefits to applying and qualifying for a business loan vs a personal loan:
- Access to more capital
- Better interest rates
- Better loan terms.
If you are hoping to expand your business and don’t have the necessary capital to do so, 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 your personal finances and business finances separate. Having good business credit means you are less likely to use personal assets for collateral.
In simple terms, having a good business credit score means that you are limiting your personal exposure and risk.
Here’s another plus: having a business score will mean that your personal credit will not be impacted by any financial difficulties your business may encounter.
Good Credit Gets You 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, but they will also be likely to give you better terms and rates when borrowing.
A good business credit score means that your business is more likely to be approved for a loan with favorable rates. Conversely, having a bad business credit score makes it much more likely that your business will be denied access to funding.
Having a high business credit score can help you obtain lower interest rates and higher borrowing limits.
A good business credit score not only makes it easier for you to gain access to favorable business financing, but it also makes it easier to negotiate better terms with your business suppliers.
If you need to buy equipment or need to increase your inventory and have a good business credit score, suppliers are more likely to forgo prepayment and they may even allow you to purchase on credit.
A strong credit score signals to suppliers that you’re good for the money and will settle any payments or debts in a timely manner.
So, how do you establish business credit? Read on!
How To Establish Business Credit
Establishing business credit is straightforward. However, it can take some time which is why the entire process requires some planning.
Specifically, you not only want to establish business credit, but you’ll want to focus on your small business credit scoring.
Small business credit scoring (SBCS) is a relatively new transactions lending technology for making ‘micro credits’ under $250,000 ($250K) that was adopted by most large U.S. banking organizations in the latter half of 1990s and has since become more widely used in the U.S. and abroad. The extant research strongly suggests that SBCS has increased small business credit availability in a number of dimensions, including: increasing the quantity of credit extended; increasing lending to relatively opaque, risky borrowers; increasing lending within low-income areas; lending over greater distances; and increasing loan maturity.”
The following section will walk you through some steps you can take to establish your business credit score.
1. Form A Business Entity
If you operate your business as a sole proprietor, you are exposing yourself to personal risk as your business and personal credit and assets will be legally attached to one another.
If you register your business as a Limited Liability Company (LLC), partnership, or corporation you will legally separate your business and personal credit and assets.
Basically, what this does is creates a business entity that is separate from you as a person. This means that when you enter into contracts or apply for a loan, your business will be treated separate from you as an individual.
2. Obtain an Employer Identification Number (EIN)
When you incorporate your company as an LLC, partnership, or corporation, you will be required to create an employer identification number (EIN).
Think of your business’ EIN as your company’s social security number.
You will use this number when opening a bank account, filing tax returns, applying for any necessary business permits and licenses, and applying for business credit.
3. Open a Business Bank Account
If you plan to apply for credit now or in the future, you will need to have a business bank account. Your company’s bank will be used as a reference when filling out credit applications.
Once you have your employer identification number (EIN), you can open a bank account for your company.
Having a business checking account will help when applying for a business credit card from that same bank. Establishing independent credit and debit cards for your business will make it easy to keep your personal and business expenses separate—you won’t need to use your personal accounts to make any company purchases.
4. Maintain Good Credit Lines with Suppliers
When you buy supplies, equipment, materials, or inventory, make those purchases on credit—if your vendors and suppliers are willing to work with you under those terms. The payments you make will be reported to business credit reporting agencies.
Pro tip: aim to work mostly with vendors and suppliers that report to business credit reporting agencies.
5. Always Make Payments on Time
If you want to establish a high business credit score and—more importantly, if you want to keep it—then you need to always pay your company bills in full and on time.
Payments made on time and for the full amount will show financial institutions and lenders that you know how to responsibly manage your finances. This, in turn, will be reflected in your business credit score.
Late payments and payments not made in full will negatively impact your business credit score.
How to Build Business Credit
In the previous section, we went through some of the steps a company needs to take to establish business credit.
This section will focus on how companies can maintain that business credit and how they can build their business credit on an ongoing basis.
1. Utilize Debt Strategically and Use Credit Responsibly
When you borrow and repay funds in a timely manner, you are building your business credit.
Securing a business credit card can help your company in two keyways. The first is providing you with access to funds that you may otherwise not have immediately.
The second is establishing a line of credit that can be used as an effective tool in building your business’ credit profile.
A couple of things to keep in mind:
- The best approach is to use your business credit card and pay off the amount in full each month.
- Monitor your credit utilization. In other words, keep an eye on your credit limit. Experts recommend using 30% or less than your credit limit to increase your chances of being approved for a loan.
2. Pay Your Bills On Time (… or early!)
We can’t stress enough, the importance of paying your bills on time.
“If you want to establish a high business credit score and—more importantly, if you want to keep it—then you need to always pay your company bills in-full and on time.”
Banks and lenders look at how quickly you pay suppliers and whether you are making payments on time when making a decision about a credit application.
Similarly, credit rating agencies look at when payments are being made to determine a company’s credit score; generally speaking, credit rating agencies take on-time payments as a sign that a company is hoping to improve its credit score.
Pro tip: if you pay early, you may get “extra credit” points. In other words, paying early can help you build your credit score quicker.
3. Monitor Your Credit Regularly
The first step to maintaining your business credit is to regularly monitor it. Keep in mind that there are different business credit reporting agencies, so you need to make sure that you are monitoring all your company credit files.
The three major business credit reporting agencies in the U.S. are:
- Dun & Bradstreet credit reports and scores.
- Equifax business credit reports and scores.
- Experian business credit reports and scores.
You’ll want to regularly check up on your business profile to spot any problems or irregularities that need correcting. Ensure that the information the credit reporting agencies have is up to date. If you notice any outdated or incorrect information, you’ll want to reach out to the agency so that the necessary changes can be made.
4. Focus on Creditworthiness for the Long-term
A huge part of building and growing your business’ credit depends on your business’s financial history. Establishing a robust credit profile takes consistent and responsible use of credit lines over a long period of time. Therefore, it’s important to begin focusing on establishing business credit now, no matter how small or young your business is.
Factors that Affect Your Business Credit Score:
- How long you have been in business.
- Your annual business revenue and whether revenue is increasing year on year.
- Any business-owned assets (real estate, intellectual property, equipment, raw materials).
- Business credit and loan history.
- Public records.
- Company size.
- Your line of work/business industry.
While all these factors are considered when determining your business credit score, at the end of the day it all, mostly, boils down to one thing:
Payment history. If your company pays bills in full and on time, chances are it will have 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 has a different range of credit scores.
|Business credit score||Score range|
|Dun & Bradstreet PAYDEX||0 – 100|
|Intelliscore℠ Plus from Experian||0 – 100|
|FICO® LiquidCredit® Small Business Scoring Service℠||0 – 300|
|Equifax Business Delinquency Risk Score||224 – 580|
A number higher on the scale represents how likely your business will be to pay vendors and suppliers on time.
For instance, a PAYDEX score greater than 80 indicates your business is low risk, based on past payment history.
Dun & Bradstreet PAYDEX
|Score Range||Risk of Late Payment|
|80 to 100||Low Risk|
|50 to 79||Medium|
|0 to 49||High Risk|
Intelliscore℠ Plus Risk Class Breakdown:
|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℠
|155||Min. score to pass the SBA’s pre-screen |
process is currently 140.
|160-165||Most SBA lenders’ minimum score|
|155||Min. score to pass |
the SBA’s pre-screen
process is currently 140.
lenders’ minimum score
Because each reporting agency uses different scales and metrics to assess your business’ risk of delinquency and defaults, it’s important that you regularly monitor all your business credit profiles.
This blog from Nav can help you better understand good business credit scores and how different reporting agencies determine the score.
Tips and Resources to Build Your Business Credit
Form A Business Entity
When thinking about how to build your business credit score, you will want to start out by registering your business as an LLC, corporation, or partnership.
This will help you maintain your corporate veil by keeping separate your personal and business financial assets and liabilities.
For remotely operating businesses and work-from-home entrepreneurs keep in mind that once filed, your business details become a public record. It’s highly advised to safeguard your home address and personal phone number to maintain your privacy and preserve that separation.
To learn more, read our detailed guide on using a virtual address for LLC registration.
Register with a Credit Reporting Agency
Once you have registered your business and opened a business bank account, you’ll want to consider registering with a major credit bureau. Ideally, you will register with the top three credit reporting agencies:
- Dun & Bradstreet 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 and your business financial habits, you need to make a habit of regularly checking your business credit profiles.
Monitor how your score changes over time and catches any irregularities before they become a bigger problem down the road.
Your business credit score represents your financial reputation. It dictates how much you can borrow to grow your business, the interest rates you get on business loans, and the terms suppliers and vendors are willing to provide to you. Monitor and protect that score across all credit reporting agencies.
Consider a Commercial Business Address
A commercial business address can help build your business’ credibility in a variety of ways. A commercial business address will help you build business credit in the following ways:
- To register and incorporate your company.
- To open a business bank account.
- To open a business credit file.
- To set up bills and utilities in your company’s name.
More to the point, when forming your business entity and registering for your business license, you will be required to name a business address in order to complete the registration process. This address will be published and become public record.
If you don’t operate out of a traditional brick-and-mortar location, this can introduce privacy and security concerns.
It’s 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. Nor can you use a P.O. Box as a business address when forming your 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 to register all your necessary business licenses.
A Virtual Office Address:
- Gives your business credibility.
- Can be used to apply for business licenses and permits.
- Helps you separate your personal information from your business information.
- Offers an extra degree of privacy and security (no need to list your home address in public records).
Small business owners and entrepreneurs with little to no office space needs can obtain a commercial business address by purchasing a virtual office service in any city of their choosing.
While the process of establishing and building business credit is not complicated, it requires consistency over time.
There are different steps that you can take to build your company’s credit score, but the first step to building good business credit is: to pay your bills on time.
If you have questions, about using a virtual address or a virtual phone number for your business, please feel free to contact us through Live Chat. We’re happy to help.