The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
While there are several similarities between building your personal credit and building your business credit, there are important nuances to consider for the latter.
If you’re looking to build the creditworthiness of your business, read on to understand the crucial steps needed to ensure your business is on the right path.
Setting up your business to build credit is crucial to help your business thrive long term. Building business credit is a process that takes several years, so patience is a virtue. Missing any payments could hurt your progress, so staying on top of your finances is crucial.
We’ll review the steps needed to build and maintain your business credit.
If you haven’t already, you’ll need to set up the legal groundwork for your business. This includes creating a legal name, establishing your business structure and registering your business according to your local state laws.
You’ll need to establish your employer identification number (EIN) with the IRS, which is analogous to your personal Social Security number. Once your business is registered and you acquire your EIN, your business will be able to open a bank account, file taxes, apply for licenses and more.
One of the three business credit bureaus requires a unique identifier number that standardizes their reporting practices, known as the Data Universal Number System (DUNS). While it is voluntary and free, your business must request a D-U-N-S Number by establishing a profile with Dun & Bradstreet.
As the standard business identifier for the federal government, having a D-U-N-S number allows you to bid on government contracts and apply for loans and even federal grants. It also allows other businesses you may interact with to access your credit profile through the D-U-N-S lookup directory.
Your credit’s length of history is an important factor in your creditworthiness. The length of the history dates to your first opened line of credit. It’s crucial to assess which line of credit will be the most high yield for your business in your early stages.
Opening a business credit card is one of the simplest ways to start building credit. Typically the first step is to separate your personal finances from your business by opening a business bank account. Then, you also can open up a credit card specific for businesses to build your business credit.
There are several options when it comes to lines of credit that can help fund your business, including business lines of credit, business loans and other traditional loans like mortgages.
A business line of credit is similar to a credit card, where your business is approved to borrow up to a certain dollar amount of unsecured debt, meaning you will not need to put up any collateral and will incur interest only on the money borrowed.
Meanwhile, a business loan is a lump sum from the lender that is paid back over time with interest and typically requires collateral to secure.
A line of credit is usually best for accessing capital to fill gaps in cash flow, whereas a loan is usually best for financing a specific investment for your business to grow, like new equipment or an acquisition.
Your business can also apply for traditional loans like mortgages or car loans. Remember that only some lenders report to the business credit bureaus. To see your credit benefit from taking out a particular line of credit, you’ll want to check whether it will be reported.
While some forms of credit are common for personal and business use, others are more specific to businesses that work with vendors and suppliers, commonly known as trade credit.
These lines of credit are business-to-business agreements and are generally used to purchase goods or services on a net 30-, 60- or 90-day payment terms—meaning you’ll pay for the goods or services within a period you’ve agreed upon via an invoice after you’ve received them.
This extends your cash flows with no interest so long as the invoice is paid on time. As you build relationships with your vendors and suppliers and build your creditworthiness, you can also negotiate more favorable terms, such as longer net terms.
Your payment history and credit utilization are important factors to keep in mind when keeping your credit score healthy. Pay your creditors on time, or even early if possible—only companies that pay early are able to achieve Dun & Bradstreet’s perfect Paydex score.
With utilization, the general rule of thumb is to use 30 percent or less of the total credit available to you to demonstrate to other lenders that you can cover your monthly minimum balance.
There are a variety of penalties or negative items that can damage your business credit, ranging from minor to significant. Smaller offenses like a single late payment will have less severe consequences, but more serious negative items can hurt your credit much more.
These negative items can make it difficult—if not impossible—to open new lines of credit and can damage your business’s reputation with other lenders.
It ultimately depends on a variety of factors, including the structure of your business and its cash flow. It can take between one to three years to establish your business credit given the amount of time it takes to legally set up your business and establish initial lines of credit.
Similar to how there are some ways to more quickly increase your personal credit score, the best advice is to establish your credit early and monitor it regularly.
No, businesses can have multiple credit scores. There are three credit bureaus that generate reports for business creditworthiness: Experian, Equifax and Dun & Bradstreet.
You may recognize the first two, as they also report on personal credit, but they each utilize different data to generate business reports.
Among other sources, Experian collects information from suppliers and lenders, while Equifax utilizes data from the Small Business Finance Exchange (SBFE). Meanwhile, D&B only reports on business credit and specifically focuses on a business’s interactions with its vendors and suppliers.
You must pay a fee to each bureau for your business credit report. You’ll want to obtain a report from each bureau at least once per year to monitor your credit and ensure the data is accurate. Each bureau offers dispute resolution processes if you need to update your business’s information or correct an error.
Potential lenders, vendors, investors or clients can access your reports to assess your company’s financial health. Unlike your personal credit, your business’s credit score has no right to privacy, meaning anyone can access your business credit reports.
While they’ll also need to pay a fee to access your reports, anyone can request your credit report from any of the three business credit bureaus.
Each business structure has different obligations when it comes to credit. If you own a sole proprietorship where your personal and business finances are closely tied for legal and tax purposes, you may need to provide a personal guarantee using your personal credit to open business lines of credit.
Further, a strong personal credit score may help your business qualify for certain lines of credit. On the other end of the spectrum, a corporation creates a business entity entirely separate from its founder(s), meaning your personal and business credit are entirely separate.
Repairing your business credit requires understanding what negative items may be hurting your score, then working to resolve them. It may range from getting payments back on schedule and maintaining lower credit utilization to challenging inaccurate negative items on your credit report.
Building and maintaining good credit for your business ultimately helps you to grow your business. From having more bargaining power to negotiate better contract terms to enticing investors to fund your next venture, a strong business credit history is the key to long-term growth.
If you need assistance with a personal credit reporting issue, Lexington Law Firm can help. We have a team of consultants that can help you work to address errors on your credit report and provide additional credit repair services. To get your free credit report consultation and learn more, contact us today.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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