Businesses – just like individuals – have credit reports. Establishing credit for your business can be vital to your company’s success if you intend to access borrowed capital to fuel growth and fund other business initiatives. 

Before you can establish and begin building credit for your business, your business needs an identity. After you choose your business name, you’ll register it with the city and state where you do business, and decide on the type of entity you’ll operate as. The usual business entities are:

• Sole proprietor
• Limited liability company (LLC)
• Corporation

Your business entity will impact your personal liability, how you file and pay your taxes, along with income and tax reporting requirements to both the state and federal governments. Depending on the type of business, your business entity will make a difference, so it is worth consulting your accountant, an attorney, or other trusted financial advisor. 

Creating your business entity also entails having a separate phone number and physical address from your personal information. If you plan on hiring anyone to assist in your daily operations, you’ll also need an employer identification number (EIN) from the IRS.

Once you’ve got all this set up, it’s time to consider establishing business credit. Building business credit is a crucial step in securing the future financing options you’ll be able to access.

What is Business Credit?

Everyone has a personal credit score that is a reflection of your personal creditworthiness. The same goes for businesses. Like your personal credit, your company has a credit profile that represents how your business meets its financial obligations.

All businesses have a credit profile but the credit bureaus that maintain business credit information, such as Dun & Bradstreet, are not the same as those used for monitoring individual credit.

When your business approaches a borrower or other business in the hopes of obtaining credit, these entities will use your business credit profile to help them make a financing decision.

Why You Should Use Business Credit

For most small business owners, your personal credit will likely be part of any business creditworthiness decision, but building a strong business credit profile should be a priority to help ensure long-term access to business financing.

If your business is less than a few years old, in the eyes of a lender evaluating your business creditworthiness, your personal credit score will play a bigger role in your ability to borrow.

It’s universally considered best practice to separate your business financials from your personal financials so establishing business credit is important. Although your personal finances will likely be part of the decision, establishing a strong business credit profile will minimize that impact. 

One of the first steps you should take is to begin separating your personal and business finances. Open a bank account in your business’ name and make sure your personal and business transactions are separate. Most business lenders will not approve a business loan application to a business without a business account.

Obtaining an EIN, as mentioned above, also helps. An LLC or corporation is the best way to legally separate your personal entity from your business entity. Your personal attorney or tax accountant can help you determine if this will be of value to you and your business.

All about business credit bureaus

Here are a few facts about business credit bureaus:

• Business credit bureaus collect and distribute financial data about businesses. There are others, but the three main business credit bureaus are Dun & Bradstreet, Experian, and Equifax.
• Each one of these credit bureaus creates a business credit profile of your business. Unlike your personal credit score, your business credit is actually a collection of scores or reports. The better your profile, the more likely your business will qualify for business financing.
• Unlike your personal credit score, your business profile is public and can be viewed without your consent. And in addition to lenders, other businesses, government agencies, and potential investors can view your business credit profile to decide whether or not to do business with you.

Do you know your business credit scores?

Although the personal credit bureaus may not be carbon copies of each other when they report your personal credit, they all base their scores on the FICO score.

If you’ve ever checked your personal credit score, you’ll notice that among personal credit bureaus, your scores are pretty similar. And even if a bureau uses a custom scoring method, you’ll still pretty much be in the same category among lenders.

Business credit bureaus are different in that they obtain their information from several different sources. At Dun & Bradstreet, for example, your profile is weighted to your credit relationships with vendors in addition to general information about your business available in the public record

Similar to your personal credit score, your business credit profile affects your company’s ability to operate on a credit basis.

How You Can Build Business Credit

Following the advice above, you can build a good, strong credit profile by focusing on these additional steps to really boost your business credit ranking:

• Make sure the information in your profile is accurate—the individual credit bureaus all have a process to do this
• Pay your bills on time, early if possible
• Make sure your business credit lines report to the business credit bureaus (if they don’t report to the bureaus, it won’t help build a strong profile)

Not every vendor, creditor, or lending institution reports to every business credit bureau. For instance, the issuer of your business credit card might report to Experian’s business bureau, but not to Dun & Bradstreet. The catch is that you probably won’t know this until you’ve retrieved your business credit report.

This is why monitoring your business credit through more than just one business credit reporting bureau is necessary. If your current credit accounts aren’t boosting your business credit rating, think about adding a couple credit references.

With a subscription to Nav’s Business Loan Builder, you can see all of the major credit bureaus’ ratings for your business in one easy-to-navigate dashboard.

Additional Ways to Boost Your Business Credit

1. Ask your current net 30 vendors if you can establish a tradeline

A vendor or supplier line of credit is especially important for retail businesses because you have to purchase your products before you can sell them. See if your suppliers will give you the ability to pay back your products on terms, such as net 30, 60, or 90-day terms.

This is a powerful way for new businesses to start establishing a strong business credit profile.

2. Obtain a business credit card that reports to the business credit bureaus

There are credit cards specifically designed for retailers, such as the Brex Ecommerce card or the American Express Plum Card, which both allow for 60-day payback periods with no interest.

This is also a great way for a new business to build a profile. If you want to build business credit with your credit cards, be mindful of getting credit cards that report to the business credit bureaus.

Final Thoughts

To build a strong business credit profile, use the above types of accounts and make on-time payments for six to 12 months. You will see a dramatic increase in your business credit scores.

If you’re new to establishing business credit, this will start you off on very strong footing. Once you have good business credit, business revenues of at least $200,000 per year, and have at least two years of business under your belt, you will have more options available when looking for a small business loan, such as SBA loans, online loans, and traditional business loans or lines of credit.