Updated October 31, 2019

How to Build Business Credit

Read more about Business

A good business credit score can increase a company's value and protect personal credit. But how can I build my business credit fast? Read on for the answer.

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

You can also use business credit to apply for services like:

  • Utilities
  • Leasing
  • Business insurance.

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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

The goal is to build your business without using personal credit. Until that happens, you may be asked to provide a personal guarantee.

In this article, you'll learn about:

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 are also an important first step to get your business up and running until it can acquire new lines of credit independently.

Starting a business with bad personal credit
You can build strong business credit even with poor personal credit. But you may need to get creative when applying for financing since lenders will likely review your personal finances until your company develops its own credit profile.

Start by formally establishing your business (more on this below). Then look into financing options like:

  • Trade credit
  • Secured business credit cards
  • Revenue-based financing

With discipline and responsible financial management, you should be able to develop strong credit for your business that won't be impacted by your personal credit situation.

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. 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.

It's important to separate your business' expenses from your personal expenses as soon as possible. This article from Lovely Financials explains how to both open a bank account under your business' name and how to determine if something is business or personal expense.

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 away. 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 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 a useful little bonus that can boost your business.

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.

Building Business Credit in 30 Days
The fastest way to build good business credit is to start right away. After you've formally established your business, consider opening a business credit card or other line of credit.

Be sure to pay off your bills on time (or even early) to establish good vendor relationships. And monitor your business credit report regularly for mistakes that may unfairly lower your score.

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.

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

Companies that Build Business Credit

Much like personal credit bureaus, some companies collect information about your business activities from lenders.

These business credit bureaus can vary by industry. Do your research to determine which will most benefit your business, starting with these major reporting agencies.

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 businesses using various scores. Their Financial Stress Score, for example, 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 reporting agency for personal credit 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.

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.

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.

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 steps to give your business a healthy credit start.

Write to Kim Shackleton at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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