Building strong business credit is essential for any company seeking to grow, obtain financing, and create a professional reputation. Business credit separates your personal finances from your company’s, making it easier to access credit lines, loans, and better terms with vendors. This guide will walk you through the steps to establish and build business credit effectively.
1. Incorporate Your Business and Get an EIN
The first step in building business credit is to legally separate your business from your personal finances. This can be done by:
- Incorporating your business: Forming a legal entity, such as an LLC (Limited Liability Company) or corporation, creates a distinct entity that can build its own credit profile. Sole proprietorships do not separate personal and business credit, so incorporating is a crucial step.
- Obtaining an Employer Identification Number (EIN): An EIN, issued by the IRS, functions like a Social Security number for your business. It’s used to file taxes, open business bank accounts, and establish your business credit profile.
You can apply for an EIN through the IRS website, and it’s free.
2. Open a Business Bank Account
Once your business is incorporated, the next step is to open a dedicated business bank account. This helps establish your business as a legitimate entity and keeps personal and business finances separate, which is important for tax and credit purposes.
- What you need: To open a business bank account, you’ll need your EIN, business incorporation documents, and identification. Choose a bank that offers business-specific accounts with favorable terms for your needs.
A business bank account helps establish a financial history that potential creditors can review when you apply for credit.
3. Establish a Business Address and Phone Number
Your business needs its own address and phone number to build credit. Using your personal address or phone number could limit your ability to separate personal and business credit.
- Business address: This doesn’t necessarily have to be a physical office. A virtual address or a P.O. Box can work, as long as it’s professional and consistent across your business documentation.
- Business phone number: A dedicated business phone line or a VoIP service will give your business a professional presence. List this number in directories to increase credibility.
Many credit agencies use public directories to verify your business, so having your information consistently listed is important.
4. Register with Business Credit Bureaus
Just as with personal credit, your business needs to establish a credit history with business credit bureaus. The three major business credit bureaus in the U.S. are:
- Dun & Bradstreet (D&B): This is one of the most widely recognized business credit bureaus. To establish credit, you’ll need to apply for a DUNS number, a unique identifier for your business.
- Experian Business: Your business credit profile can also be built through Experian, which compiles financial information from public records and lenders.
- Equifax Business: Another major bureau that tracks business credit scores based on financial information and payment history.
By registering with these bureaus, you ensure that your business activities are reported and contribute to your credit profile.
5. Apply for a Business Credit Card
One of the easiest ways to start building business credit is to open a business credit card. Using the card responsibly and paying it off in full each month helps build a positive credit history.
- Choosing the right card: Look for a credit card specifically designed for businesses that report to business credit bureaus. Compare factors like interest rates, rewards, and any annual fees before applying.
- Use it wisely: Keep credit card utilization low—ideally under 30% of your credit limit—and make all payments on time. Consistent, on-time payments are key to building a strong credit score.
A business credit card not only helps with credit but also provides access to funds that can help manage cash flow.
6. Establish Trade Lines with Vendors
Vendor trade lines, also known as net terms, are another crucial component of building business credit. Many suppliers and vendors offer net payment terms (e.g., net 30, net 60), which allow you to pay for goods or services within a set period.
- How it works: If you’re approved for net terms, the vendor will extend credit, allowing you to purchase products upfront and pay for them later.
- Building credit: Not all vendors report to business credit bureaus, so ensure that your vendors do report your payment history. Prompt payments help build your business credit profile.
Establishing trade lines with several vendors shows credit agencies that you’re able to manage business debt responsibly.
7. Pay Your Bills on Time
The most important factor in building and maintaining strong business credit is your payment history. Creditors and credit bureaus want to see that your business consistently pays its bills on time or early.
- Automate payments: Set up automatic payments for your business credit cards, vendor invoices, and loans to ensure timely payments.
- Track expenses: Use accounting software to manage your cash flow and avoid late payments. Paying early may even help you establish stronger relationships with vendors.
Late payments can negatively impact your credit score and damage your relationships with suppliers.
8. Keep Your Debt Levels Low
While it’s important to use credit to establish your business profile, managing that debt wisely is crucial for maintaining a good credit score.
- Credit utilization: Aim to keep your credit utilization under 30%. This means if your credit limit is $10,000, try to keep your balance below $3,000.
- Pay off debts: When possible, pay off any business debts to avoid accruing interest and maintain a strong credit profile.
Keeping your debt levels low improves your creditworthiness and shows lenders you’re not overly reliant on borrowing.
9. Maintain a Positive Credit Mix
Diversifying your credit accounts will help improve your business credit score over time. In addition to a business credit card, consider:
- Business loans: Securing a small business loan can build credit, provided you make timely payments.
- Lines of credit: Opening a business line of credit provides flexibility for cash flow management and helps build credit.
A healthy mix of credit types can positively impact your business credit score, just as it does with personal credit.
10. Check Your Business Credit Reports Regularly
Monitoring your business credit report is an important step in maintaining strong credit. This allows you to catch any errors or inaccuracies that could harm your credit score.
- How to check: You can request your business credit report from Dun & Bradstreet, Experian, or Equifax. Some services may charge a fee for detailed reports.
- What to look for: Review your report for inaccurate information, such as accounts that don’t belong to your business or incorrect payment histories.
If you spot any errors, dispute them with the credit bureau to ensure your report accurately reflects your business’s creditworthiness.
11. Use Credit Responsibly
While it’s important to establish business credit, be mindful of how you use it. Don’t take on more credit than your business can handle, and avoid applying for too many credit accounts in a short period of time, as this can hurt your score.
- Maintain a budget: Have a clear financial plan in place to avoid overspending and taking on unnecessary debt.
- Use credit strategically: Use credit to invest in business growth opportunities, such as purchasing new equipment or expanding operations.
Consistent, responsible use of credit will build your business’s credit profile over time and open up more financing opportunities.
Conclusion
Establishing business credit is a crucial part of growing and sustaining a successful business. By separating your personal and business finances, incorporating your company, and building a strong credit profile, you’ll gain access to better financing options and improve your company’s reputation with suppliers, lenders, and customers. The process takes time, but with careful planning and responsible credit use, your business credit score will become a valuable asset for the long term.
FAQ
1. How long does it take to establish business credit?
It usually takes six months to a year of consistent credit activity, such as timely payments and responsible use of credit, to establish a good business credit score.
2. Do I need an EIN to build business credit?
Yes, an Employer Identification Number (EIN) is necessary to open business bank accounts and credit accounts, which are essential for building business credit.
3. Can I use my personal credit to help build business credit?
While some creditors may consider your personal credit when you first start, it’s important to focus on building separate business credit over time.
4. What’s the difference between business and personal credit?
Business credit is tied to your business’s financial activity, while personal credit is based on your individual credit history. Keeping the two separate protects your personal credit from business risks.
5. How can I improve a poor business credit score?
To improve a low score, focus on paying bills on time, reducing debt, and regularly monitoring your credit report for errors. Over time, these steps will help improve your score
