How to build your small business's credit

You’re probably already familiar with the importance of having a strong personal credit profile. If you have a business, the same rules apply. Business credit means establishing the ability to obtain credit in the name of your business.

When you first start out, you’ll need to personally sign onto any obligations of your business. But as your business and its credit reputation grow, you may eventually be able to obtain credit for your business without a personal guarantee. And once you do, your business credit will enable you to leverage and expand your business practically without limits.

That’s why it’s important for business owners to know how to build business credit. The process starts when you first launch your business and can be accomplished in seven steps.

How to build business credit in 7 steps

1. Build your business

In order to build business credit, you first need to build a business! First and foremost, that means generating cash flow. After all, without a cash flow, there is no business. But it’s super important if you want to build business credit since lenders will rely on your cash flow to provide the funds to service your debt.

Even if your business is not profitable early on – which it probably won’t be – a solid cash flow will give your business stability and credibility. Profitability will follow.

Don’t underestimate this step because it may take longer to accomplish than you expect.

2. Separate your business and personal finances

There are multiple reasons for implementing this strategy early on. First, by separating your finances you’ll begin establishing the business as a separate and distinct entity. Second, that separation will make your business look more professional – especially to future lenders. And third, separating your expenses will make tax preparation simpler.

It’s much easier to do this from the get-go than it will be to attempt to untangle your business and personal finances at a later date.

3. Make sure your business is legal

This starts with choosing your business name. “Worldwide Widget Company” sounds a lot more businesslike than “John Smith’s Widgets”. It also does a better job of separating you personally from your business.

Next, you’ll need to decide what type of business format you want to use. That can be a corporation (C or S), limited liability company (LLC), partnership, or sole proprietorship. This needs to be established early because it will determine the legal existence of the business. You should consult an attorney to discuss the best option for your business.

Once you’ve chosen a name and a business format, you’ll need to register your business with the proper agencies. Start by applying for an employer identification number (EIN) with the Internal Revenue Service. This acts as something like a Social Security number for your business. It’s important to get it early because it will be needed for registering your business and applying for credit.

Depending on the business format you choose, you may need to register your business with the Secretary of State in your state of residence. This will likely be a requirement if you choose a corporation format.

For credit purposes, you should apply for a DUNS number with Dun & Bradstreet. It can be done directly on the company website. D&B is a popular business credit reporting agency, and having the number will enable you to begin building business credit.

Other business credit reporting agencies include Experian and Equifax, but you won’t need to register with either bureau. You’ll begin building business credit with those agencies as you obtain loans and lenders report your payment history.

4. Open a business bank account

This is one of the first steps you need to take so that you can begin building a business banking relationship from the start. You’ll also need to open a business bank account to help you deposit income receipts, as well as to provide merchant services. The bank account should be in the name of the business, which will require you to provide a legal business name, as well as an EIN. Having a business bank account is one of the best ways to establish the stability and credibility of your business.

New financial products have made accessing your money easier, especially for smaller, one-person operations. A Found business checking account is tailored for sole proprietors who need a business account but can't afford minimum deposits or minimum transaction fees. If your business takes in deposits more than $4,000 per month, a national bank like U.S. Bank might be the best option. And for people who use Quickbooks for accounting and payroll, Axos bank has a seamless Quickbooks integration.

5. Establish trade lines with vendors

While employing the “cash on the barrel” strategy is a good way to manage personal finances, you should take advantage of business trade lines as soon as possible. Not only will that help you to leverage financial resources, but you may be able to use those vendors as valuable credit references, at least until you build a formal business credit profile.

You may also be able to request that larger vendors report your payment history to Dun & Bradstreet, Experian, and Equifax if they don’t already.

6. Apply for credit in the name of your business

Now and again, you will need to apply for credit for your business. Whenever possible, make sure the credit will be in the name of your business. Until your business credit is well-established, you’ll almost certainly need to be included personally with any credit arrangements. But once you establish a solid track record with your business credit, you’ll eventually be able to obtain credit in the name of your business only.

One of the best ways to begin developing formal business credit is by applying for a business credit card. They can be fairly easy to get, especially if your personal credit is strong. But make sure the credit card issuer will report your payment history to the business credit bureaus. That will help you to begin building business credit and a business credit score that will be the ticket to more credit arrangements in the future. Revenued offers a business card with flexible spending options and access to capital based on your revenue and spending habits.

7. Pay all obligations on time!

Once you begin developing credit lines, whether they are vendor trade lines, a business credit card, or other business loan arrangements, be sure to make all payments on time.

Your payment history is the foundation of business credit. If you make your payments on time consistently, you’ll have a strong credit profile and a healthy credit score. But if your payment history is erratic, the result will be a less-than-flattering credit profile. And that will undo everything else you’re trying to accomplish.

Why you should build a credit score for your business

Credit is essential to business because revenues and expenses don’t always match up timewise. A set of expenses designed to produce a given amount of income will arrive before the invoices get paid. Credit will be needed to bridge the gap.

To obtain and maintain that credit, you’ll need to build a good credit score for your business. The better the score, the more access you’ll have to credit. With a really good score, you’ll be able to use the additional credit as leverage to build your business even faster.

In addition, a good business credit score will enable your business to obtain major loans, like car loans and real estate mortgages. A good credit score is also a strong sign of a healthy business, especially when you are trying to develop relationships with other businesses.

But perhaps the biggest payoff is that once your business has a strong enough credit profile, you’ll be able to apply for and obtain credit under the business alone. You may no longer be required to provide personal guarantees for loans and other financing arrangements.

However, as you build and improve your business credit score, don’t neglect your personal credit score. Even if your business has an outstanding credit score, creditors and other parties may continue to require a personal credit check for certain transactions and activities.

How to check your business credit score

Once you register your business with Dun & Bradstreet, Experian, and Equifax, you should be able to have access to your credit score with each. The process will be unique to each bureau and may involve payment of a subscription fee to grant you regular access.

Once you have that access available, you should check your credit score on a regular basis. If it’s unacceptably low, or there is a significant drop, investigate to find out if there are any discrepancies being reported. That can include late payments or even collections reported in error. If you find them, dispute them and get them cleared off as soon as possible.

Tips for maintaining and improving your business credit score

In addition to regularly monitoring your business credit report, and dealing with any discrepancies, you should use the following tips to improve your business credit score:

Make all payments on time

This includes telephone and utility payments. Those companies may not report your good payment history to the credit bureaus, but they will report collections and other negative information.

Build credit slowly

Growing your business credit is one of the best ways to improve your business credit score. But it’s best done gradually. Too much credit obtained all at once can have a negative impact on your credit score.

Avoid the big credit hits

These include collection accounts, tax liens, and judgments. Unfortunately, all are fairly common when it comes to business credit. Any one of them can sink a business credit score in short order.

Keep your credit utilization in check

Credit utilization is the amount of outstanding debt you have in proportion to your total credit limits. To keep your credit score healthy, keep your credit utilization ratio at less than 30%.

Not surprisingly, the above tips are the same ones you would use to improve your personal credit score. That’s not a coincidence since the credit rules are very similar between personal and business.

Frequently asked questions (FAQs)

Does an LLC have a credit score?

It can, but only if you follow all the necessary steps (listed above) to establish and maintain the business credit that will give your LLC a credit score.

What is the fastest way to get business credit for an LLC?

There’s no special path for an LLC to follow to get business credit. An LLC is simply a business legal classification, like a C corporation or a partnership. The process of obtaining business credit is the same as it is for any other type of business entity.

How long does it take to establish business credit?

If you obtain a business credit card, you can generally expect it to take at least six months – with on-time payments – before a credit score is developed for your business. If you can get other forms of credit, such as a business auto loan or even another business credit card, your credit will build faster and higher.

Once your business has had credit established for at least two or three years, and has three or more creditors reporting to the credit bureaus, your business should be able to show a respectable credit score.

What is the starting credit score for a business?

Credit score ranges for businesses are different from those for personal ones. While personal credit scores range from 300 to 850, business credit scores are completely different.

The Dun & Bradstreet PAYDEX Score ranges from 0 to 100, with 80 or above being a good score. 50 to 79 is considered a moderate risk level, while a score below 50 is considered high risk. A good starting credit score for a business might be anything above 50.