How to build business credit

Want to make running your business easier? Establishing business credit or improving your credit profile is a great way to do that.

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 a healthy business credit history isn’t as difficult as you might think, and these tips can help you get things started.

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, CEO of Good Funding.

Why business credit matters

You can apply for a business credit card or small business loan based on your personal credit if you’re just starting out, but eventually it’s a good idea to separate your personal credit from your business credit.

Once you establish your business credit you can apply for a business loan without any personal liability; the business becomes responsible for paying back the loan.

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 Consulting.

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 borrowing costs.

Your business credit score is based on your track record of handling your business finances, such as your business checking account, any credit accounts you open with merchants such as office supply stores or hardware stores and any business credit cards you open — as well as any loans you take out.

How long does it take to build business credit?

Most business owners don’t like to hear this, but when it comes to building business credit, slow and steady wins the race.

Nat Wasserstein, a restructuring advisor and managing director of Lindenwood Associates in the Greater New York City area, estimates that it takes three years or more to build business credit.

“Usually, credit applications say they want you in existence for at least three years,” Wasserstein says.

In some cases, creditors may require just one year, he says, but that isn’t the norm.

“They want to see you’ve been around,” says Wasserstein. “Once you have that, they want to see that there isn’t anything outstanding. There are no judgments. They need to have enough time to determine whether they want to extend credit to that company.”

7 steps to build business credit

1. Apply for a federal tax ID

The credit bureaus use this to track your business. You can apply online at the IRS’ website.

2. Open a business bank account

One of the most basic ways to start establishing business credit is to open a bank account in the name of your business and use that account for all of your business deposits and withdrawals. Note that you’ll need to bring your federal tax ID with you to open one.

Be sure to handle this account carefully to avoid bounced checks and overdrafts. It will be easier to keep your books and do your taxes if you keep good records.

Additionally, you should maintain an adequate balance so you don’t have overdrafts or bounce checks. It’ll show creditors you are responsible with your finances.

3. Form a business entity

Setting up an LLC or other business entity, such as an S Corp., can make it easier to establish your business finances as separate from your personal finances.

It’s important to get advice from an accountant and an attorney on the right business entity for you. The decision you make can have tax implications — and making the wrong choice can cost you money.

4. Apply for a business credit card

Using a business credit card for all your business charges will help you establish business credit. Ideally, pay your balance in full every month, but if you can’t do that, make sure you’re not maxing it out. High credit utilization can lower your business’s credit score.

If you have a low credit limit and need to put charges such as airfare and hotel stays for business trips on the card regularly, consider applying for a second card so you don’t have to max out either of them.

Also, take time to research business card options before deciding 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 percent cash back on every purchase, with no annual fee. This card is geared toward those cardholders looking to build or rebuild their credit.
• American Express Blue Business Cash™ Card: 2 percent 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 percent cash back on every purchase and no annual fee
• Ink Business Unlimited® Credit Card: 1.5 percent 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.

5. Establish trade credit

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 Gerri Detweiler, former education director at Nav.

If you regularly do business with a big box office supply store or hardware store, ask if it offers a line of credit or a store credit card. Use it for your purchases at that store and pay the bill on time.

6. Make sure the major credit bureaus are tracking you

Sometimes it takes a while for the major credit bureaus to track a small business. Use the tools on their sites to see if you are being tracked and, if so, to get your business credit report.

Three credit bureaus that may be tracking your business are Dun & Bradstreet, Experian and Equifax. To get tracked by Dun & Bradstreet, you need to apply for a DUNS number.

Banks and creditors use this number to check your company’s creditworthiness, and D&B’s service is the most widely used. The D&B credit score is called a Paydex score and ranges from 1 to 100.

Ryan Boatsman, partner and COO at the business advisory firm DeLap, says an 80 or above is considered good credit ­— roughly the equivalent of a 750 personal FICO score.

7. Stay current on all of your bills

Many established vendors report to Dun & Bradstreet and other credit bureaus, according to Nate Wasserstein, a restructuring advisor and managing director of Lindenwood Associates in Upper Nyack, New York.

It’s even possible that a vendor like your phone company will report your payment patterns to credit bureaus, so stay current, he advises. Put reminders in your calendar to pay your bills, so you don’t have any blips on the radar screen in the next few years.

When to apply for a business credit card

After repeated, good financial behavior, you’ll improve your chances of applying successfully for a business credit card. A good point to try doing this is at the one-year mark. At that point, credit issuers will have a decent amount of activity with which to evaluate you.

You can also check your business credit report to make sure your credit is in a good place before applying. Sometimes it can take a while for creditors to report to credit bureaus. Credit card issuers will probably check your personal credit, too, so make sure that’s where you’d like it to be as well before you apply.

If you’ve fallen behind and paid some of your bills late — a common occurrence in new businesses with unsteady cash flow – wait until you have 12 months of a perfect or near-perfect track record to apply.

Even if you can only get a credit card with a small credit limit, such as $1,000, at first, be patient. Rome wasn’t built in a day and neither is business credit.

As you pay this bill on time each month, you’ll build a stronger and stronger credit profile. Just be sure not to use all of your available credit.

Bottom line

Building business credit is more of a marathon than a sprint. Start early if you think you will need to apply for substantial credit or a business loan. And make sure you take good care of your personal credit in the meantime.

Typically, you will have to provide a personal guarantee for business credit, so the better your personal credit score, the easier it will be to get the business credit you need.

If you have strong business credit, you’ll have access to better interest rates. That can lower the overall cost of running your business and help you to achieve bigger profits.

*All information about Capital One Spark Classic for Business and the Discover it Business card has been collected independently by CreditCards.com and has not been reviewed by the issuer.