A Step-by-Step Guide to Build Your Business Credit

Why It Matters and How to Do It Responsibly

Most small business owners know their personal credit scores. However, the concept of business credit remains more elusive. Business credit is entirely separate from personal credit, and there are different steps one must take to establish and build business credit. While the road to building good business credit is a long one, it is majorly beneficial to your business’s growth and success. Higher business credit scores allow you to secure more favorable loan terms and access rewarding business credit cards.

Business Credit Explained

Business credit, also known as commercial credit, is a pre-approved amount of money issued by a lender to a business. The money is accessed by the borrowing business to help meet financial obligations, for example, operating expenses or funding for new business opportunities.

Business credit scores are numbers that indicate to lenders whether your business presents a high or low credit risk.

Most people are unaware that, unlike a personal credit score, a business credit score is not one universal number. There are three major credit bureaus, each with their own separate scores and scoring methods: Experian, Dun & Bradstreet, and Equifax. Each of the business credit bureaus issue their own business credit score using different scoring systems. However, there are a number of common factors that each of the bureaus use when determining your business credit score. These include:

  • Demographics, such as business age and size
  • The industry your business is in. This is known as your Standard Industrial Classification (SIC) codes
  • Your business’s payment habits over time. For example, a business that has a history of paying its bills in full and on time will have higher business credit scores
  • Any outstanding balances
  • Your credit utilization, i.e. the percentage of your total credit that is currently in use
  • The number of business credit applications and inquiries that have been carried out. For example, if you’ve applied for a large number of business credit cards or loans in a short period of time, that will negatively impact your business credit scores
  • Delinquent financial behaviors on your business profile, such as bankruptcy, liens, collections, or judgments

From these factors, Experian and Dun & Bradstreet score businesses from 0 to 100, whereas Equifax scores businesses from 101 to 816. On each scale, higher scores indicate that your business is a more reliable credit borrower. The benefits of higher business credit scores include access better business credit card offers and loan rates.

6 Ways To Build Business Credit

Unlike personal credit, building business credit is not an automatic process. You must first establish a business credit file. Establishing a business credit file requires the business owner to take a number of steps.

Step 1: Register Your Business

The first step to establish business credit is to register your business. This gives your business its own legal identity.

To register your business, you must choose a business name, a business location, and a business structure. There are numerous business structures, and you should take the time to research which structure best suits your business as this will majorly impact your business. A business structure affects numerous things like:

  • How easy it is for your business to raise money
  • The amount you pay in tax
  • Your personal liability as a business owner
  • The amount of record-keeping and administrative duties you must carry out

Your location and business structure determines how you will register your business. Most small businesses are required to give details to their state and local governments.

Step 2: Get an Employer Identification Number (EIN) and Data Universal Numbering System (DUNS) Number

Upon registering your business with your state and local governments, it’s time to get your Employer Identification Number and Data Universal Numbering System Number.

An EIN is a number used by the IRS to identify businesses for tax and credit purposes. It’s needed to open business bank accounts, apply for business permits and licences, pay federal taxes, and hire and pay employees. It enables business owners to remove their social security numbers from their business’s credit profile. Getting an EIN is free and can be done in a matter of minutes on the IRS website.

A DUNS Number is used to identify businesses and their business credit scores. It is also used to establish a business credit file with Dun & Bradstreet so potential creditors can perform credit checks on your Dun & Bradstreet business credit report. To establish a business credit file with Dun & Bradstreet, you will need to register with them online and set up a business profile. Getting a DUNS Number for your business is free and can be done online.

Step 3: Open a Checking and Savings Account for Your Business

Distinct business accounts make it easier to separate your business and personal expenses. This makes record keeping and tax filing easier to manage. Since you’ve received your EIN and DUNS numbers, you’re now able to open a checking and savings account in your business’s name.

After carrying out these steps, your business is now a legal entity with its own credit reports, bank accounts, and identification numbers. Now that your business and its credit report are set up, you can start taking action toward building your business’s credit.

Step 4: Take Out a Small Business (SBA) Loan

A loan can be a great source of funding and an opportunity to build business credit. There are numerous types of loans, but the type most suited for small businesses is a Small Business Association (SBA) loan. SBA loans are guaranteed by the US Small Business Association. This enables small businesses to receive more favorable rates than a traditional bank loan would provide. SBA loans generally fall into the range of $50,000 to $5 million, with a loan term ranging from 10 to 25 years.

Step 5: Get a Business Credit Card

Using a credit card specifically designed for your business is an effective way to build your business’s credit. However, business credit cards must be used responsibly. This means familiarizing yourself with the card’s terms and paying off your balance on time and in full every month. It is also recommended to keep the business credit card for solely commercial purposes. Mixing personal and business expenses on the same card leads to financial mismanagement and tax headaches.

Business credit cards have numerous additional advantages. These include:

  • Higher credit limits than personal credit cards
  • Rewards such as points or cash back on business expenses
  • Benefits such as purchase protection, merchandise discounts, extended warranties, and travel insurance
  • Travel perks such as membership status with airlines and hotels and free hotel stays
  • Assistance in the separation and management of business and personal finances

There is no such thing as an objectively superior business credit card for all businesses. However, there are a few guidelines you should follow when researching which card is best for you:

  • Does the card provider report credit card activity to the business credit bureaus? The first thing you should do is explicitly ask whether a card provider reports your activity to the three main bureaus. As you are trying to build business credit, it is imperative that you get get a card that reports your good behavior to the bureaus.  
  • How are the card’s rewards in terms of your business expenses? An excellent business card offers cash back, points, or miles on a business’s regular purchases and expenses. When researching the market, contrast card rewards and figure out what card will bring your business the most value. Try to align the card’s rewards with your business’s goals.
  • How are the card’s benefits? Rewards are not the only thing you should be comparing. Many business credit cards come with valuable benefits suites that can include things like travel and shipping insurance, extended manufacturers’ warranties, and purchase protection.
  • Do the card’s rewards and benefits justify the annual fee? If you are contemplating a card with an annual fee, make sure that the rewards and benefits received are worth the cost. For example, the American Express Business Platinum card, which offers an extensive suite of rewards and benefits, charges a $450 annual fee. If you are required to travel often for business the annual fee is potentially worth the cost. If not, the fee may be an unnecessary financial burden.
  • Is the signup bonus decent? Businesses generally spend more than average consumers. The signup bonus of a good business card should be higher than that of personal cards to reflect this.
  • Is the customer support service good? It is worth taking note of a card provider’s customer service, as this will make things easier for you in the long term.

Step 6: Practice Financial Responsibility

The most important piece of advice for building business credit is one of the simplest: Act responsibly. A business loan and business credit card, when used responsibly, will help you build business credit, but  they will have a detrimental effect on your business’s credit scores if you aren’t careful. In order to build business credit you should:

  • Always make your payments on time and in full
  • Keep your credit utilization low
  • Separate your business and personal finances
  • Use a variety of credit sources, for example, a loan and a business credit card. Do not rely on only one credit source.

When it comes to applying for business loans and business credit cards, there is a catch-22: higher-end business credit cards and larger loans with the best rates require good business credit scores. If you are a small business with little-to-no business credit, you therefore might not be able to access the best credit. If this is the case, start small. In terms of business loans, start with a low amount and pay it back on time and in full. In terms of business credit cards, there are cards for businesses with bad credit and secured business credit cards. While the rewards on these cards can leave something to be desired, they do offer the opportunity to build your business credit scores.

In conclusion, the path to building business credit is not a short one. It requires proactivity, patience and, most importantly, responsibility. However, building your business credit will pay off in the long term. It allows your business to secure more capital and access high-tier credit cards with fantastic suites of rewards and benefits.

By Guest Contributor Oliver Browne, Financial Industry Analyst at Credit Card Insider

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