Updated June 18, 2019

How to Build Business Credit

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Your personal credit can't support your business long term. Read on to learn the best way to build business credit for the financial health of your company.

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As a small business owner, the lines between your personal and business life can easily become blurred. Creating a separate credit profile will protect your personal assets and save your business money.

With business credit, any missteps won't affect your personal finances. You can use it to apply for services like utilities, leasing, and even business insurance.

Ideally, your business credit report will stand on its own. Until that happens, you may be asked to provide a personal guarantee.

Here are 6 smart steps to establish your business credit:
  • Separate your business with an LLC or corporation
  • Get a federal tax identification number (EIN)
  • Open a business bank account
  • Get a business phone number
  • Apply for a business credit card
  • Establish a line of credit with vendors or suppliers

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What Are Personal Guarantees?

Personal guarantees essentially require you to act as a co-signer for your business. The same way your children may need you to co-sign on their first car loan, your business needs your support when growing its credit history.

As the name suggests, personal guarantees make you personally responsible for the payment of the credit agreement should the business not be able to pay. In other words, signing a personal guarantee can put your personal assets at risk.

But they also have value. Personal guarantees are a first step to get your business up and running until it can acquire new lines of credit independently.

Key Fact: A personal guarantee may be necessary until you establish and build business credit. Even later, many small business credit cards will still require one.

Separating Your Business

Before you can build credit, you'll need to establish your business with its own credit profile. Here are some steps you can take:

Choose a Structure
Selecting and finalizing a structure for your business is a crucial first step in building business credit.

Some of the most common types of business structures are:

  • Sole Proprietorship: This structure involves one person, or married couple, owning and operating a business. The proprietor is personally responsible for the business financial obligations, and any profits or losses are recorded on their personal tax returns.

  • Partnership: Consisting of two or more owners, partners can be personally liable for financial obligations of the business. Earnings and losses are reported on the owners' personal tax returns.

  • Limited Liability Company (LLC): An LLC limits personal financial liability from the owners while allowing them to record profits and losses on their personal taxes.

  • Corporation: Corporations are completely independent legal entities that eliminate liability from owners. Because of their tax requirements, however, owners can end up being taxed twice on earnings.

Get an Employer Identification Number (EIN)
An EIN is like a Social Security number for your business. You'll use it to apply for a business checking account and to file business taxes.

To obtain an EIN, you can apply online through the IRS using a Taxpayer Identification Number, typically your Social Security number.

Open a Business Bank Account
This account lets you pay your business expenses. Not only will it help keep your finances separate, but a business account also creates a relationship with that bank.

Pay Business Expenses with Business Accounts
Once you have opened an account for your business, use it. This serves to increase the separation between your personal and business life, and it will also make filing your taxes much easier at year-end.

Don't neglect your business's online presence. For tips on how to launch a Wordpress site for your company, be sure to check out this blog from ProMarketing.

Building Business Credit

Once you have proper separation from your personal expenses, you can build a positive credit report. These steps will help establish your business credit report:

Apply for Credit
You likely won't get approved for a large line of credit right out of the gate. Typically, lenders like to see about two years of established credit before approving anything sizable.

But taking out modest loans using a personal guarantee is a good first start.

Getting a larger loan approved for your business needs is much easier if you've already taken out smaller ones.

Work with Vendors that Report to the Bureaus
When possible, check to make sure your vendors do report before engaging in business. Some don't.

In this case, you have two options:

  • Ask your vendors to report to an agency.
  • Seek out those that already do.

Without having information reported on its credit report, your business won't have any record of payment information.

Pay Expenses Early
Paying early results in a better rating on your business credit report. It's like earning a little bonus every time you're ahead of the game.

Open a Business Credit Card
This can be another way to get activity reported to the major credit bureaus. A credit card specifically for your business also cultivates a positive relationship with banks.

Want more info on building business credit? American Business Funders illustrates the different tiers of business credit and what you can expect.

Benefits of Business Credit

An independent credit report is a vital first step in creating financial security within your business. But building business credit will take work. What's the payoff?

Lower Interest Rates
A good business credit score will help you gain better interest rates on loans, credit cards, and other lines of credit.

Eliminate Prepay Requirements
Many suppliers require prepayment if they don't feel comfortable with your business' credit history. This can tie up precious cash flow. Having a better credit report can reduce and eliminate the need for prepayment obligations.

Better Trade Terms
Suppliers can be flexible with their trade terms for the right buyers. A better credit report can give your business leverage when negotiating payment due dates, discounts, and return policies with its suppliers.

Major Business Credit Bureaus

You want your lenders to report your business' activity to the major business credit bureaus. But just who are these bureaus?

The answer can vary based on industry. Do your research to determine which credit bureaus will be most beneficial for your business.

These three major reporting agencies are a good place to start.

Dun and Bradstreet
D&B is one of the top business credit agencies, with over 300 million company records worldwide. They analyze information provided by businesses and lenders, including payment activity and publicly reported earnings.

D&B uses your information to grade your business using various scores. Their Financial Stress Score indicates if a company is likely to stop operations within the next year.

To get started, you can register your business for a D-U-N-S number. Doing so will allow your lenders to report payment information on your business' credit profile.

D&B offers a free service, CreditSignal, to help keep your business credit profile on track. Learn more below.

This is a reporting agency for personal credit. But it also has a small and mid-sized business sector. Their database houses over 99% of all U.S.-based companies.

Just as Experian does with personal credit, they assign businesses a type of credit score based on the summary they've gathered.

Equifax also reports on business credit, including payment history, bankruptcies, public records, and business demographics.

Monitoring Business Credit

After you've taken steps to build and establish credit, be sure to monitor the information to ensure accuracy.

Mistakes can be costly. Lenders use credit reports to determine payment terms and interest rates. Having incorrect information on your business' credit report can seriously impact cash flow.

Unlike consumers, businesses are not legally entitled to a free credit report. Most business credit report will cost you. Read on to learn about CreditSignal, one of the best free options.

This service, provided by Dun and Bradstreet, helps keep your business credit profile on track. With CreditSignal, you can sign up for alerts of changes to your D&B credit profile. You can also access your credit information on their online dashboard or mobile app at any time.

One downside: CreditSignal only provides information from their platform. However, D&B is one of the largest business credit reporting agencies. So this is a great way to start monitoring your business credit.

Paid Options
Outside of CreditSignal, your best bet is to pay for a full credit report. Doing so will give you the best picture of your business' financial health.

D&B, Equifax, and Experian all offer paid subscription services that allow you to monitor your business credit report.

You can also purchase one-time credit reports through Equifax and Experian. These can be more cost effective for your growing business—as long as you remember to monitor them regularly.

Bottom Line

Building business credit doesn't have to be a daunting process. Establish the separation between your business and personal finances right away.

Take out small lines of credit using a personal guarantee so that your business can get approved for larger projects later. Then, monitor your business credit profile and consistently update information as needed.

Follow these simple steps to give your business a healthy credit start.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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