How to Build Business Credit
Business credit reports are kept and maintained by major credit bureaus, so one of the keys to building excellent business credit is relatively simple: conduct business with legitimate companies. Dealing with companies that pay debts on time, keep debt levels manageable, and report payment history can help your business credit.
Some entrepreneurs indeed struggle to identify the additional steps to building business credit, so let’s break these steps down.
To establish excellent business credit and continue to build on it, businesses should:
1) Build a Strong Foundation
Entrepreneurs should not rush the set-up process of their businesses. Instead, they should ensure that even the most simple processes are running smoothly and that the business is viewed as professional and legitimate by lenders, clients, peers, and competitors. So how do businesses form strong foundations?
Pay attention to relevant, basic details such as:
- A business phone number
- A professional email address, different than a personal account
- A business address: a P.O. Box or the owner’s home address is acceptable
These small details may seem insignificant, but they appear on business credit reports. Every business should always maintain a professional image, and these details will help.
2) Register the Company
If the business is an LLC or an S-Corp, the company is already officially registered in the state, and annual filings are required.
If the entrepreneur formed the business in a different state, the entity might need to be registered additionally in the state where the business exists.
Also, business owners who choose to operate as sole proprietors or independent contractors can file a “Doing Business As” (DBA), otherwise known as a fictitious business name, in their state.
However the business is structured, business licenses and permits are vital to running a legal operation. Specific licenses depend on the state, so check with state officials.
Credit agencies use this public information to start the company’s business credit profile. Once the profile exists for the business, you are on your way to building strong business credit.
3) Open Accounts that Report to Business Credit Agencies
The most valuable information reflected in a credit report is how and when a business pays its bills. This data is important because creditors and lenders use past payment history to predict whether or not the company will pay its debts on time.
The Importance of Reporting to Credit Bureaus
However, not all accounts report to business credit bureaus, and businesses that want to build strong business credit rely on this reporting. We recommend establishing at least 2-4 accounts with companies that reputably report to business credit bureaus. As the small business grows, you can add to this number.
These accounts might include:
- Business credit cards
- Business loans and financing
- Vendors and suppliers
- Credit builder accounts
There is no requirement for vendors or lenders to report to business credit bureaus; instead, the vendors or lenders can decide. However, entrepreneurs focused on building their business credit should choose accounts that report. Having one or more reporting accounts with payment history helps to establish business credit.
4) Obtain a D-U-N-S number and an EIN
DUNS Numbers
Dun and Bradstreet is a business credit reporting company just like Experience and TranUnion for consumers. A DUNS number is a distinctive nine-digit number. Dun & Bradstreet created this number for use by businesses. However, some entrepreneurs are unsure whether they have one. Luckily, it is free to check, and if the answer is no, DUNS numbers are free to obtain.
Although other credit bureaus such as Experian and Equifax have separate identifying numbers, small business owners do not have to request these numbers.
EIN Numbers
Some financial applications require Employer Identification Numbers (EINS). These are known as social security numbers for the business. EINs are sometimes reported to business credit reports.
The IRS does require some businesses to obtain an EIN, but having an EIN is not necessary to establish business credit. While a DUNS number is vital to building business credit, an EIN is useful but not vital.
5) Open a Business Credit Account
Another excellent way to establish and build business credit is by opening a business credit card. Most of these cards report to the major credit agencies, and if the business pays the bill on time, the business’s credit rating will rise.
Qualifying for a Business Credit Card
Business credit cards use the small business owner’s credit scores and income records to determine if they qualify and how much of a credit line they should be allotted. These useful credit cards are available to established businesses and startups, and many come with valuable perks, such as travel points, cash back, or discounts on purchases.
Be Prudent with Credit
Many business owners find that having more than one business credit card puts them on the fast track to credit building. However, some entrepreneurs overextend themselves and their businesses by spending too much, too fast. This risk can result in lowering credit scores for the business, so it is best to be careful and spend slowly, building credit as time progresses.
For new business owners who do not qualify for a business credit card: do not worry. Work diligently to improve your credit score, and return to this important step whenever possible. We recommend waiting at least six months to a year before applying again since too many applications can also damage one’s credit.
Overall, business credit cards can be useful tools for building credit, as long as the business pays its bills on time and spending does not go out of control.
6) Make Payments on Time
It may seem obvious, but payment history is one of the essential factors when calculating credit scores. “Days Beyond Terms” or DBT is a phrase used in business credit reporting that depicts how many days late a payment is.
For example, let’s say Bob owns a shoe store, and his terms with the vendor state that the debt must be paid on the 30th of the month. Bob forgets to pay, however, and his eventual payment is late by two days. As a result, his account is tagged as 2 DBT, or “Days Beyond,” which can impact Bob’s current credit and his plans to continue building credit for his eventual shoe empire.
7) Monitor All Credit Accounts Closely
As important as everyone monitors their credit history, it is even more integral for businesses. While it is helpful for small business owners to stay aware of their credit-building progress, it is even more valuable for business owners to spot mistakes in their credit reporting.
Finding a Credit History Mistake
When an individual finds a mistake in their business credit history, they must act. We recommend that they immediately file a dispute with the credit bureau doing the reporting. It also may help to contact an attorney at this point. Emails, screenshots, and other messages can provide sufficient evidence for the dispute, so keep records of everything.
When small business owners check their credit reports, they should do so with more than one agency. The business can add more credit references if the current credit accounts are not actively helping improve the business credit score.
Remembering to actively monitor a company’s business credit helps individuals discover problems earlier. In addition, this action allows the business to deal with the mistakes and continue to build its business credit. On the other hand, if credit mistakes are overlooked or ignored, they can lead to bigger problems.
Here are some of the most popular questions we receive regarding building credit history:
How Fast Can Someone Build Business Credit?
Usually, it takes 2-4 months for new accounts to register with business credit reports. After that, the bill must be paid on time for several months to create a good credit score. However, with patience and a dedicated payment schedule, established and new companies should be able to build an excellent business credit rating in 6-12 months, approximately.
At What Level Does Business Credit Begin?
First off, different business credit scores use different ranges. For example, Experian and D&B scores go from 1-100. However, other scores use different numerical ranges.
A business that has not yet built its credit will probably have a low credit score. On the other hand, the business may also have no score. Neither of these options means that the business has “bad” credit; it simply means that there are either not enough credit references or insufficient payment history.
What is an Example of Business Credit?
The typical business credit entity does not exist because any type of business can build business credit. For example, LLCs, S-Corps, C-Corps, sole proprietors, and independent contractors can build business credit.
However, a legal business entity must separate one’s credit from the business itself.
Will Opening A Business Bank Account Affect a Person’s Credit Score?
Since personal credit card reports go to consumer bureaus, this is not possible. Business and personal credit bureaus are different entities, and there is no overlap in this case.
While opening a checking account for your business is a smart idea, business bank accounts do not usually report to business credit bureaus. However, getting a business checking account can help to separate one’s personal and business credit, and some lenders even ask to see business bank statements when deciding on a loan.
Are Business Loans Reported To Business Credit Bureaus?
Numerous traditional lenders, banks included, report to business credit. They do this by reporting lines of loans and credit to the Small Business Financial Exchange. This exchange collects information that might be used in business credit reports sold by certified vendors, such as major business credit bureaus. In short, any lender can choose to report their accounts to agencies that report business credit.
What Shows Up On A Business Credit Report?
Lenders that report to SBFE will not appear on business credit reports. However, those accounts can appear on specific reports ordered by lenders. Keep in mind that business credit reporting is a voluntary system, which means lenders do not have to report.
Can an Individual Add Accounts to Their Credit Report?
Before including them in their reports, many credit bureaus require vendors and lenders to report accounts directly to them. It is possible to search out companies that report, however, or use a service that reports on accounts the business pays for a fee.
Is Debt Needed to Build Credit?
Though it can be useful, debt is not necessarily needed to build debt. Owners can use a net30 account from the supplier or vendor since these also report to business credit. One must pay the balance of the Net 30 account in 30 days.
What Are the Benefits of Building Business Credit?
All businesses should be aware of the value of business credit. Business owners can make the correct decisions concerning their debt and credit accounts when they have the proper knowledge. By following the steps listed above, businesses can establish and continue to build the type of credit that will enable their companies to succeed.
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