Building strong business credit is worth the effort. Credit lines open many doors, allowing entrepreneurs to buy necessary equipment and inventory, hire employees, launch marketing campaigns, and keep cash flow steady while revenue grows.
Unfortunately, getting approved for business loans and credit cards is a challenge. According to a 2019 Federal Reserve small business credit survey, more than half (53%) of companies seeking new financing didn’t obtain the amount they requested.
Financing deficiencies were more noticeable among younger companies or those with weak credit portfolios. Most lenders won’t extend a traditional business loan until a business is two years old.
On the other hand, there are easy ways to establish creditworthiness. As you learn how to build business credit, you’ll notice each step focuses on improving the factors used to calculate your business credit score. That’s because establishing business credit results in getting a better business credit score.
With a good credit score, you can secure financing with favorable credit terms. Companies will offer business credit cards with higher credit limits and lower interest rates. Your suppliers might even provide more flexible payment options.
Much like a reputation, a business credit score isn’t built overnight. If you’re ready to increase your buying power while lowering borrowing costs, begin with the following steps:
How to build business credit in 11 steps.
Following the 11 steps below will position your business for credit success. Discover how to lay the foundation for a good business credit score and get approved for new lines of credit.
1. Incorporate your business or form a limited liability company (LLC).
It’s important to separate your business finances and business credit score from your personal finances and personal credit score. To do so, you can form a corporation, an LLC, or other business organization. As a result, you’ll protect both credit scores.
If you’re one of the 23 million sole proprietorships in the U.S., you may prefer to use your personal credit score for business credit purposes.
But as loans and credit limits grow, business missteps like late or missed payments could compromise your personal assets. Also, at least one in five consumers have an error on their credit reports — mistakes that cost you business funding opportunities.
Conversely, lenders and investors see distinct business financials as more legitimate. You should also set up a business phone number and get it listed in a directory if you haven’t already. This is another piece of evidence that your operations are credible and, as we’ll discuss later, encourages business credit bureaus to start reporting your credit scores.
2. Sign up for an Employer Identification Number (EIN).
To build credit, get an EIN (also called a business tax ID number) from the IRS. Think of an EIN as your business’s Social Security number.
If your business is a corporation or partnership, employs workers, or withholds taxes on wages and salaries, then you need an EIN number. Sole proprietors can get an EIN, too. Applying is as simple as completing a short questionnaire.
Getting an EIN signals to the three main business credit agencies — Dun & Bradstreet, Experian, and Equifax — that you own a legitimate business entity. It’s more likely that each agency will open a business credit file for you. Your EIN will be connected to your business credit history and future credit card applications.
3. Open a business credit file with the three credit bureaus.
Dun & Bradstreet, Experian, and Equifax measure risk factors associated with businesses. Broadly, they evaluate qualities like business age, payment history, and the variety of accounts in your business credit report.
Then, they generate a business credit file and issue multiple business credit scores. It’s important to note that the bureaus may have already created a credit file for your business. To check, visit each company’s website and search your business name. If the files exist, purchase copies or use your free reports to review them for errors.
If your business isn’t listed, get an EIN and then ask a supplier or lender to report your payment history to an agency. Another way to open a credit file is to get a D-U-N-S Number directly with Dun & Bradstreet.
4. Establish trade lines with your suppliers.
If you don’t qualify for other forms of credit — and even if you do — establish trade credit lines with your suppliers. You’ve probably seen “net” payment terms like net 15 or net 30 on invoices from your vendors.
These terms give you a certain number of days, typically from the invoice date, to pay what’s owed. These are lines of credit offered by your office supply store, for example, when you place orders. When you pay invoices on time or early, you’re creating a positive credit repayment history.
Ideally, a few of your suppliers already report payments to the business credit reporting agencies. If they don’t, ask if they'd consider becoming a trade reporter. Generally, it’s good practice to pay invoices early when possible and negotiate lengthier payment terms. This shows lenders that you keep financial commitments, and that you've earned more credit over time.
5. Open a business bank account.
A common myth is that you need revenue to open a business bank account. You don't, but you should manage money through a business checking account to keep your books accurate and simplify taxes.
Typically, your bank will have terms that stipulate personal accounts can’t be used for business transactions. If you operate a corporation, you must keep business finances in an account separate from personal finances.
If you use a business credit card for financial transactions, you can pay the credit card bill with your business checking account.
6. Get a corporate credit card or business credit card.
Avoid charging business expenses to a personal credit card — there are better alternatives for daily business transactions. Business credit cards and corporate credit cards differ in important ways, but both are great tools for establishing credit.
Business cards are available to companies and sole proprietors of all sizes, while corporate cards are available to businesses with over $4 million in annual revenue and $250 million in annual expenses.
One unifying element between business and corporate credit cards is that most card issuers require applicants to sign a personal guarantee before approving either one. Under these terms, you're held personally liable for payments even if your business can't pay, putting your personal credit score and assets at risk.
Brex is one of the only corporate credit cards that doesn't require a personal guarantee. To help you build business credit history, Brex also reports your on-time card payments to Dun & Bradstreet and Experian.
Credit limits for corporate cards, or the maximum amount a borrower can spend, are set by factors such as business credit score, debt amount, and repayment history.
Alternatively, Brex evaluates companies based on modern metrics like cash balance and sales revenue to provide credit. Credit grace periods, anywhere from a few weeks to a few months, give you time to pay down balances.
7. Make repayments on time (or early) every time.
Positive payment history is a large portion of credibility. Paying balances on time is one of the fastest ways to establish credit, whether you're paying an invoice, a loan, or a credit card bill. It’s equally important to note that late payments and missed payments will damage your credit rating.
Credit limit is also affected by overdue bills. Your lender can adjust your account's credit limit at any time, and they may lower it due to payment delinquency.
8. Apply for loans with lenders who report to the business credit bureaus.
Most lenders require that your business has operated for two years before approving small business loans. This is a barrier to borrowing for fledgling businesses, but there are alternatives like microloans from the U.S. Small Business Administration (SBA).
Look for business financing with creditors who report to the business credit bureaus. The same rules apply to loans: repay early if possible, and don't apply for too many lines of credit at once.
9. Keep existing credit accounts open and be patient.
If there's one piece of advice to offer on how to build business credit, it's that it's a marathon, not a race. The older the credit line, the better. Keep existing credit accounts open because as your accounts age, your creditworthiness improves.
You may want to see immediate results on your credit report because building business credit has so many positive effects. But the truth is that updates, like adding new trade lines, may not appear for up to two months. In the meantime, keep debt low and review your reports.
10. Monitor your business credit reports and business credit scores.
No one has as much of an incentive as you do to review your business credit data — each of the credit agencies has over 200 million active files to manage.
Just like your personal credit reports, you can get a business credit report, but they are not generally free. There are free services, like CreditSignal and Nav, that let you monitor your score and see report summaries. This isn't the same thing as your full credit report. You will, however, get alerts when your score changes.
As your credit improvement strategy takes shape, follow your business credit scores. We've written a detailed guide explaining good business credit scores for Dun & Bradstreet, Experian, Equifax, and FICO, and how to improve each.
One major credit score influencer to watch is credit utilization ratio, or how much of your available credit you're currently using. It's recommended to keep this ratio below 30% across your accounts.
11. Update your business credit profile frequently and review it for errors.
Because businesses aren't guaranteed free business credit reports like consumers, there are three main ways to check your credit profile periodically. You can:
- Purchase credit reports directly from the three credit bureaus
- Use a financial tool that lets you access a free copy of your credit reports, or a summary version (e.g., Business CreditWise, CreditSignal, Nav)
- Request a free business credit report within 90 days of being denied financing
Once you have access to your report, make sure business information like business name, phone number, and business address isn't outdated.
Check that each line of credit is accurate. Look closely for unfamiliar or unauthorized charges, as they could be signs of fraudulent activity. Submit disputes to the respective business credit agency right away.
The bottom line on getting business credit.
Learning how to build business credit isn’t just about surviving one day to the next, although it helps. Strategic business owners prioritize establishing business credit and earning a good credit score because it's necessary to thrive in the long term.
Ultimately, you're creating a credit history and a web of financial relationships that could last for decades. As lending and borrowing get increasingly competitive, your creditworthiness will be your biggest asset, so start building today.
