How to Establish and Build Business Credit

Whether you’re a startup or established business, learning how to build business credit is important because there may come a time when you need to apply for a loan. Without a good credit score, getting a loan at favorable rates and terms may be difficult.

At some point, you’ll need access to capital to expand your business, hire more staff, purchase inventory or equipment, and cover any unexpected expenses. 

Business credit in a nutshell is the ability of companies to get financing. There are three major business credit bureaus – Dun & Bradstreet, Experian, and Equifax. Please note that Experian and Equifax have business divisions that are separate from personal credit. 

Your lenders, vendors and suppliers may pull information from one or more of these business credit bureaus when determining whether to extend your company credit and at what rates and terms.

Building business credit is not rocket science, but it does require planning and patience. This article will explain the steps you need to take in building your business credit profile and history, along with helpful tips to make sure you have a good credit score.

1. Make Your Business Lending Compliant 

Unlike personal credit where all that is required is a Social Security Number and residential address, business vendors, suppliers and creditors will check that your business is properly set up before they extend you credit. Below is a checklist of things you should have in place to ensure your business is lending compliant. Missing any of the following could hurt your chances of getting approved for credit.

• Register as a LLC or Corporation (S- or C-) with your Secretary of State.
• Use a commercial business address where you can physically receive mail. Do not use a residential address, UPS location or PO Box. Virtual offices are OK for the time being.
• Apply for the appropriate business licenses (state, local).
• Apply for industry specific licenses (i.e. contractor’s license).
• Apply for your company’s Employee Identification Number (EIN) with the IRS.
• Set up a business checking account.
• Get a business phone line separate from your personal cell phone.
• Establish your company website & domain email address. Do not use a gmail or other web based email address as your company address.
• Get listed in the 411 directory.
• Get a Dun & Bradstreet (DUNS) number for free.
• Make sure the spelling of your company’s legal name and addresses are consistent everywhere.  For example, if your address is spelled out “ABC123 St”, use that spelling everywhere and not “ABC123 Street”. Any discrepancy can result in getting denied for business financing.

2. Build Relationships with Vendors and Suppliers

Consistent on time payments is key to building up a good business credit score. Not every vendor or supplier reports to the business credit bureaus, so you’ll want to establish a relationship with those vendors and suppliers that do.

When you apply for a vendor account, they will extend payment terms such as NET30, NET60 or NET90. This means that your payment is due 30, 60 or 90 days after the invoice is issued. 

Here are a couple of vendors that currently report to the business credit bureaus: 

• Quill
• Grainger
• Uline
• Nav Business
• Home Depot Pro Institutional
• Summa Office Supplies

Each vendor will require a minimum spend before they report your payment history to the credit bureaus, so you can always contact them directly and ask what that amount is. 

3. Get a Business Card

Do not use a personal credit card to make business purchases. Not only is this important for accounting purposes by keeping personal and business expenses separate, but using a personal credit card won’t build up your business credit. In fact, using a personal credit card can potentially hurt your credit score. For instance, if you max out your credit card for business purchases, your FICO credit score will decrease. 

When applying for a business credit card, make sure the card issuer reports to the business credit bureaus. Major banks like Chase and Citi report business credit card activity to the major bureaus.

If you’re a startup with bad personal credit, you can apply for a secured business credit card. This requires leaving a deposit with the credit card issuer in the amount equal to the credit limit. If you default on payments, the creditor closes your account and takes your security deposit. If you are applying for a secured credit card, make sure the card issuer reports to the business credit bureaus.

4. Get a Business Line of Credit

Unlike a business credit card, a line of credit allows you to draw funds up to your maximum credit limit. The funds are then deposited directly into your checking account. If you’re a new business, you may need to secure a line of credit with collateral such as real estate or stocks/bonds. Established businesses (2+ years) with at least $100K annual revenue may be eligible for unsecured lines of credit.

Just like a business credit card, you’ll want to make sure that the lender reports your payment history to the major business credit bureaus. You can get a business line of credit through traditional banks like Chase or online lending platforms such as OnDeck and BlueVine.

Tips to Getting Build Business Credit

Now that you’ve established your credit accounts with vendors and business credit card issuers, it’s important to take the right actions on building a good credit score. Good credit scores can save you thousands of dollars on interest payments, as well as having favorable terms. Here are some tips to build a strong score:

1. Pay your bills early. Unlike personal credit where it only matters that you pay on time, you can get bonus points if you pay early. For example, Dun & Bradstreet issues a Paydex score that is based on when you pay. The score ranges from 0-100, and an 80 score means that you pay on time. That’s the absolute score you should aim for. However, if you pay a vendor early, then you may get extra points and could potentially earn a score above 80.
2. As mentioned previously, always make sure your vendor, supplier or creditor reports to at least one of the major business credit bureaus (Dun & Bradstreet (D&B), Experian, Equifax). There’s no point putting in all the hard work to build business credit if they don’t report.
3. Pay attention to your credit utilization. Ideally, keep your balances under 30% of your credit card’s limit. If you have a high credit utilization ratio, the lenders will see you as a greater risk. 
4. Check your reports regularly to make sure your vendors, creditors or suppliers are reporting your payment history. You can sign up individually with the credit bureaus, or use a subscription service like Nav which pulls information from D&B, Experian and Equifax.

Conclusion

Just like with personal credit, having a good business credit score can get you access to capital at favorable rates and terms. You can use that capital to expand your business or manage cash flow. Now that you understand how business credit works, take action now to start building a good credit score and make it a priority. 

Get qualified for business funding today by visiting our funding platform ROK Financial.