Experts say it can take three years or more to build business credit, but some creditors may only require one year. If you’re trying to establish credit for a new business, these steps can help you get started.
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,” says Wasserstein.
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.”
Why business credit building is important
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.
Good business credit offers multiple other benefits, including:
- Lower interest rates on loans
- More confident decision-making
- Staying ahead of your competition
- Reduced stress for the business owner
Some of these benefits, like lower interest rates, are obvious. That gives you more money to spend on growing your business and outperforming your competitors. Other benefits are not as straightforward.
For example, a business owner who knows a company has good credit doesn’t have to worry as much about being able to secure funding, which can reduce stress and allow them to focus on growing the business.
How to get started building your business credit score
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.
Formalize your business
Every business owner should have a business checking account, with the name and federal tax ID of the business, that is separate from their personal one. This helps to establish the business as an entity separate from you.
Handle your checking account with care
Be sure to maintain an adequate balance so you don’t have overdrafts or bounce checks. It’ll show creditors you are responsible with your finances.
Stay current on all of your bills
Many established vendors report to Dun & Bradstreet and other credit bureaus, Wasserstein notes. 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 on which to evaluate you.
You can also check your business credit report to ensure 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 be 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.
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. That will lead to high credit utilization, which will hurt your business credit.
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.