Building business credit is similar to building personal credit, but there are some key differences to keep in mind. Read on to learn how to build and maintain a healthy business credit profile.
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Credit history and credit scores can play a big part in helping you scale your business if you want to get approved for financing.
Personal credit can only take you so far, however. At some point, you’ll need to work on building credit for your business. Establishing healthy business credit history isn’t as difficult as you might think, and these tips can help you get things started.
See related: Best business credit cards
How to build business credit: A 6-step guide
What is business credit?
Business credit is simply a way to measure how responsible your business is when it comes to managing its finances.
That’s similar to personal credit. The difference is that business credit looks only at financial activity related to running your business.
That includes factors such as:
- How many lines of credit your business has
- Balances owed on each one
- How consistent you are in paying debts and other bills on time
- Whether your business has any public records on file, such as liens, bankruptcies or judgments
“Building good business credit is all about establishing a track record of good financial habits over time, including how much you borrow, how quickly you pay it back and how you handle other financial obligations,” says Ben Gold, president of alternative small business lender QuickBridge.
Why business credit matters
Business credit is important because it can affect your ability to qualify for business financing and the terms you’ll receive.
“Business credit is a way for a supplier, lender, investor, etc., to evaluate your risk of paying back any capital lent or credit given,” says Brian Cairns, CEO of business consulting firm ProStrategix.
Poor business credit or no business credit history at all could stand in the way of opening vendor trade lines or getting approved for business loans or lines of credit. If you are approved, a lower business credit score could translate to higher interest rates and increased cost of borrowing.
How to begin business credit
The first step in beginning business credit is making sure you’ve checked off these requirements:
- Incorporating or forming an LLC to establish a separate business identity from your personal financial history.
- Getting a federal employer identification number if you don’t have one for your business.
- Opening a business bank account.
- Establishing a separate phone number for your business.
Once you’ve covered those basics, you can move on to the next step: getting on the business credit reporting bureaus’ radars.“When people first start out, they don’t usually know that they should register themselves with a credit-rating agency,” says Cairns. “They lose those months or years, which could have helped them build up their rating.”
There are three primary business credit reporting agencies to get started with:
- Dun & Bradstreet
- Equifax Business
- Experian Business
See related: How to check a small business’s credit report
To register with Dun & Bradstreet, you’ll need a D-U-N-S number. This number helps establish your credit profile with Dun & Bradstreet and you can apply for one online for free.
Getting started with Equifax and Experian is a little different. To establish credit history with either one, you’d need to have a line of credit open with a company that reports to either bureau.
Gerri Detweiler, education director at Nav, says there are two simple ways to get the ball rolling:
- Open a business credit card
- Establish vendor credit accounts
The key is making sure a business credit card or vendor reports account activity to the business credit bureaus.
“This is often confusing to entrepreneurs because not all lenders or vendors report to business credit [bureaus],” says Detweiler. “And some report to one bureau and not the others.”
How to build business credit
Similar to building personal credit, building business credit hinges on using credit and debt responsibly.
For example, if you’re opening a business credit card then you’d want to follow certain best practices, including:
- Paying on time or early each month.
- Paying in full or keeping your balance as low as possible.
- Limiting how often you apply for new business credit cards.
Also, take time to research business card options before making a decision on which one to apply for.
A business credit card, for example, can offer flexibility in carrying a balance, but that means paying interest. A business charge card could offer rewards and interest-free borrowing, but it also carries the obligation to pay in full each month.
Here are a few recommendations if you’re looking for business credit cards to build credit:
- Capital One® Spark® Classic for Business: 1% cash back on every purchase, with no annual fee. This card is geared to those cardholders looking to build or rebuild their credit.
- American Express Blue Business Cash™ Card: 2% cash back on up to $50,000 in purchases per calendar year, 1% cash back on all purchases after that; no annual fee
- Discover it® Business Card: Unlimited 1.5% cash back on every purchase and no annual fee
- Chase Ink Business Unlimited Credit Card: 1.5% cash back on every purchase; no annual fee
Keep in mind that credit card companies typically check your personal credit history and financials when applying for a business credit card. The better your personal credit, the better your odds of being approved and getting a favorable interest rate.
Opening vendor trade lines can help with creating credit history if your suppliers are willing to offer financing terms. And it may be more accessible for some business owners than a credit card.
“The great news is many of these vendors don’t check personal credit, which means they may be available to business owners with less than perfect personal credit,” says Detweiler.
Benefits of having good business credit
Good business credit is essential to your business’s health and overall growth, says Gold.
“It enables you to obtain financing when needed and provides you with the cash flow to cover the daily costs of doing business,” he says. “It also gives you the ability to respond quickly to any time-sensitive or emergency situations that might arise.”
For example, if a key piece of equipment you need to run your business conks out, good business credit could help you qualify for equipment financing and get funded quickly. That’s vital when you need to keep operations running smoothly.
Building credit for your business can also help you avoid a potentially sticky financial situation.
“Having strong business credit can give business owners more financing options and help them move away from relying on personal credit to grow their business,” says Detweiler.
Commingling business and personal finances can be problematic for a variety of reasons. In terms of lending, taking out a personal loan means you’re personally responsible for repaying it. If the business folds, lenders can sue you to attach your personal assets in repayment for the debt.
How to recover from bad business credit
The only thing that may be worse than having no business credit at all is having bad business credit. Lower credit scores can mean paying higher interest rates or being denied for credit for your business outright.
“If you have poor business credit, work to gradually build it back up,” says Gold. He says you can do that by:
- Borrowing wisely and taking advantage of loan or credit options that don’t require perfect credit to qualify
- Meeting financial obligations consistently
- Paying debts and other bills on time
Keep in mind that unlike personal credit, there’s no timeline for when negative information can fall off a business credit report. So, remember to give it time, says Cairns, when rebuilding business credit.
It can take 12 months or more of consistent positive payment history to get a poor business credit score headed back in the right direction.