A business can have a credit score and credit report, just like people do. It is used in a similar manner, helping businesses get loans, take out lines of credit at the bank, and get business credit cards.
Any business that is a separate entity from the owner, like a limited liability company or corporation, has its own separate credit, but a business where the owner is considered the sole proprietor shares credit with the owner.
Having business credit is good because it is not intertwined with your own credit. So, if you are looking into buying a home, your business credit cards and loans may not be factored into the decision since those debts are under the credit report for the business. Plus, if you are trying to obtain a loan for your business, the business’s credit will be looked at, so your mortgage and car loan will not be part of the business credit profile.
How to Obtain Business Credit
Obtaining business credit is a little more difficult than getting personal credit, and it can take time to build it up. Thankfully, there are a few things that you can do to start building up your business credit score more quickly. These tips will help you establish and build your business credit and maintain it once you establish it.
Steps to Building Business Credit
1. Form an LLC or Incorporate Your Business
The first thing you need to do to keep your business credit score and personal credit separate is make your business an official organization in the form of an LLC, corporation, incorporation, or other business organization. If you are a sole proprietor, as many small businesses are, your personal credit and business credit are the same thing, which can hurt your business or personal financing options. One missed or late payment for your personal or business credit can cause your credit score to drop a little, which can lead to you being unable to obtain financing for your business or unfavorable loan terms.
2. Get an Employer Identification Number
The next thing you need to do to begin building business credit is to sign up for an Employer Identification Number (EIN), which you can obtain from the IRS. An EIN is essentially the social security number for your business.
If you have employees, withhold waxes on wages, or are a partnership or corporation, you need to have an EIN. You can get one as a sole proprietor also. It is a fairly easy process to obtain an EIN; you just have to fill out a short form.
By having an EIN, the three business credit bureaus are told that your business is legitimate. It will make it easier for you to open business credit. The EIN will be connected to your business and used on credit applications for your business.
3. Open a Bank Account for Your Business
If you do not already have one, open a bank account for your business. This needs to be used only for business expenses and transactions; none of your personal expenses can come out of it. Also, bookkeeping and taxes are going to be much easier by having a separate account.
4. Open a Business Credit File
The three business credit bureaus — Equifax, Experian, and Dun & Bradstreet — measure the risk factors for businesses. They will evaluate your business' age, payment history, and other things that will come up in your business credit report. After this is done, they will create a business credit file for you, and each bureau will generate credit scores for your business.
They might already have a business credit file for you, which you can find by visiting each of their websites and searching for your business name. If you find a file, you can purchase it and review the reports for errors.
If they do not have a credit report for your business yet, ask one of your supplies or lenders to report your payment history to one of the agencies. You can also obtain one from Dun & Bradstreet by contacting them directly.
5. Establish Trade Credit Lines with Suppliers
Establishing a trade line of credit with your suppliers will help you build up your business credit. You have probably noticed on your invoices from them terms like net 15 or net 30, which are the terms that give you a number of days to pay once you receive the invoice. This is a line of credit from the supplier, and by paying your invoice on time or early, you are creating a good credit history.
Some of your suppliers already report your payments to the credit bureaus, and if they do not, you can ask them to become a trade reporter. It is a good practice to pay your invoices on time in general and to negotiate a payment plan if needed. This will show prospective lenders that you honor your financial commitments and make your payments on time.
6. Get a Business Credit Card
Instead of using your personal credit card for your business expenses, get a business or corporate credit card. A business credit card can be obtained by a business of any size, including a sole proprietor, but corporate credit cards are only available to a business with an annual revenue of over $4 million and annual expenses of $250 million.
With either of these credit cards, you will have to sign a personal guarantee before getting approval for the card. This will hold you liable for missing payments, but it is a great way to help your business build up business credit.
7. Make Payments on Time
The best way to build up credit is by making payments on time, every time. Whether this is a credit card bill, a loan repayment, or an invoice, late payments will hurt your credit. Having overdue bills will also impact your credit limits from lenders. A lender can change your credit limits, and they might be lowered if you have late payments.
8. Apply for Loans
Having business loans that are paid on time will help you improve your business credit rating. Many lenders require a business to be operational for two years before they will approve a small business loan. Credit unions and smaller banks may be willing to work with you sooner, and there are microloans available through the U.S. Small Business Administration (SBA). Whatever lenders you go through, make sure they report to the business credit bureaus; if they do not, your payments will not be factored into your business credit score.
When your business is more established, you can also apply for a business line of credit through your bank, which offers more flexibility than a loan. A line of credit will also help you build up your business credit score.
9. Keep Credit Accounts Open
When you finish paying off a credit card for your business, do not close the account. If you leave it open, you will be giving your business a longer credit history and help improve your business credit score.
How to Monitor Your Business Credit
Business credit reports are not usually free like they are for personal credit reports. There are some free business credit monitoring services that will give you a report summary and notify you if your score changes, but you will usually have to pay to get the full business credit report. Nav and CreditSignal are excellent free credit monitoring services. The other way to monitor your business credit is by contacting the three bureaus directly to request your credit reports. Check your business credit score a few times a year to ensure no errors are present in your credit report.
How Long Does it Take to Build Business Credit?
It can take at least one year for you to build a good business credit score, though most credit applications will require at least three years of good credit history before they will consider lending to a business.
Importance of Keeping Your Business Credit Separate from Your Personal Credit
When you first start building your business credit, your personal credit will impact it since you are just getting started, and lenders need to ensure you will make payments on time. If you have poor personal credit, this can lead to a business credit application being declined or you getting less favorable terms with higher interest rates.
Many business credit cards require a personal guarantee from the business owner that they will make the payments. So, while this is something to build your business credit, if you do not make payments on time, your personal credit can be affected.
Keeping the two scores separate as much as possible is important. If you are a sole proprietor, your business and personal credit are linked no matter what, which can hurt your attempts to get credit personally or for your business. For example, you want to buy a home, and the lender finds your business loans and business credit cards when they run your credit. Those may make a lender decide that you have too much debt to give you a mortgage loan. The other is also true; your existing mortgage loan could be too much debt for you to get a new loan for your business. That is why we recommend making your business a separate entity to keep your personal and business credits separate.
Using Business Credit to Get Funding
Once you have established your business credit to obtain different types of business funding. This includes business loans, business credit cards, and business lines of credit. A lender will look over your business credit history to determine if they should give you funding. Before applying for funding, check your business credit reports to ensure everything is accurate and you have a good credit score to help you secure the funding. You should also look at your personal credit reports to ensure those are also good. This is good to do in case the funding you are applying for looks at both your business and personal credit; a business line of credit will check both.
Help Getting Business Funding
If you need funding to help you grow your business, Fundid is re-imagining how businesses can get the funding they need to grow. Help us build you a better path to credit and funding by completing our survey. You can also join our Grant Match Program and search for grants in the Grant Marketplace.
Fundid is on a mission to get women-owned businesses the funding they need to grow so that we can all close the business wealth gap. While 42% of businesses in the US are owned by women, they only account for 4% of revenue generated by private businesses. We spend our time at Fundid thinking about what the world would look like if women also generated 42% of revenue and how to get them the capital they need to make that happen. Fundid is creating new ways to get small businesses the capital they need to grow and is built from the feedback of women entrepreneurs.