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For years, you’ve heard over and over again about the importance of maintaining a strong personal credit score. Whether from the ebbs and flows of that three-digit score that appears on your monthly credit card statement or the interest rate you were offered when you bought your first car, or even your first home—you’ve probably lived through the impact of building credit in your personal life.
But if you’re starting a business—or hoping to obtain financing for your already established business—did you know that you could be starting this process all over again? In addition to reviewing your personal credit report (which they absolutely will!), lenders and even suppliers will consider your business credit—or lack thereof—as they evaluate your eligibility for a business loan, credit card, supply lines, or any other form of financing.
But what’s the answer to this question of how to build business credit?
Just as you worked to build up a strong personal credit history as a young adult, you need to do the same for your business in its early years. To help you quickly maximize your business’s credit—and in turn its funding opportunities—we’ve created this comprehensive guide covering everything you need to know about how to build business credit.
In many ways, learning how to build business credit is quite similar to your personal credit. Credit reporting agencies collect information from the vendors and creditors you do business with and process that information through an algorithm to establish your business credit score.
However, there are some key differences. Most significant, there is no FICO equivalent on the business side of credit monitoring to streamline how credit scores are calculated. Each of the main three credit reporting bureaus for businesses—Experian, Equifax, and Dun & Bradstreet—has its own method for calculating scores. And little is known about the various formulas.
This reality—combined with the fact that you never know which business credit bureau a vendor or lender is going to consult—makes it nearly impossible to reverse-engineer the algorithms to figure out a definitive answer to how to build business credit. For the most part, you just have to manage your business finances responsibly and hope for the best.
For most businesses, the single greatest challenge to learning how to build business credit is merely learning how to get their payment histories reported in the first place. Suppliers and even lenders or credit card companies often don’t report positive payment histories, waiting only until they’re faced with late payments to bother with filing a report.
And even if your vendor does take the time to report your payments, a variety of factors related to how your business was set up can cause those reports to be deflected back to your personal credit report—or to be applied to the wrong business entirely.
But along with patience, smart financial management, and a little bit of luck, you can do a few small things from the very beginning of your business’s formation to help build business credit quickly. Let’s take a look at some of those most important early factors.
Your choice of business entity impacts almost every facet of your business, from how you file and pay your taxes to your legal liability and more. It also impacts how to build business credit for your business—and specifically whether the financial reputation you build as a business owner is credited to you personally, to your business, or both.
While the two most basic business structures—a partnership (if you’re working with a business partner) and a sole proprietorship (if you’re going it alone)—might be the simplest to work with in terms of startup and paperwork, these unincorporated structures make it more difficult for your business to establish its own credit as a separate entity. That’s because in both cases, there is effectively no legal or financial separation between yourself and your business.
To make sure that your company’s vendor and creditor relationships are helping to build your business credit, start by creating some financial separation between yourself and your organization by choosing one of these incorporated business structures:
C Corporation: Filing your business as a C corporation creates the greatest possible amount of separation between your personal finances and your business, making it easier to quickly build up your business credit regardless of your personal financial history.
Small business owners sometimes avoid C corporation structures because of the more extensive setup time and costs associated with forming a corporation. However, if building strong business credit is critical to your company’s success, it might be worth the extra time and effort to establish this or a similarly formal incorporated structure.
S corporation: Though there are some credit-building benefits to structuring your business as a C corp, many small businesses avoid doing so because of an expensive tax liability known as double taxation. Instead, some small business owners turn to the S corp structure, which offers many of the same benefits (including credit building benefits) of a C corp while avoiding the higher tax liabilities.
Limited liability company: For many small business owners, the limited liability company (LLC) structure offers the best of both worlds—a technically incorporated business entity (to create financial separation for credit building purposes) with liability protection for the owner’s physical assets, yet a much easier and less expensive registration process than you get with S or C corps.
Though the IRS doesn’t regard an LLC as its own tax entity, most vendors, lenders, and credit-reporting agencies treat limited liability companies as equal to the more formalized incorporated entities for credit reporting and monitoring purposes.
Keep in mind that while the ability to access business credit is one important part of choosing your business’s legal structure, it is not the only or even the most important factor to consider when making this critical decision. Consult with a licensed accountant or business attorney to guide your choice of a legal structure for your business.
Once you’ve chosen a legal structure for your business entity, you need to finalize any necessary paperwork to formalize that structure. The process required will vary widely based on your business’s location and the structure you choose, but this helpful state-by-state guide from the SBA website can help you determine next steps.
Appropriate legal formation is critical to your business’s ability to build credit—so regardless of your entity type, it’s important to follow all the necessary steps and maintain documentation as proof of your business’s formal incorporation.
The IRS uses what’s called an employer identification number (EIN) to monitor most businesses—particularly for employer payroll tax purposes. To the government, this number serves the same purpose as your social security number does for your federal taxes—it helps them keep track of your business, the income it has generated, and the taxes it owes.
Technically, the IRS doesn’t require all businesses to obtain an EIN—even those with a legally incorporated structure. Sole proprietorships, partnerships, and even single-owner LLCs can usually rely on the owner’s social security number for tax purposes as long as they don’t retain any employees. However, even if the IRS doesn’t require you to obtain an EIN, it’s a good idea to do so anyway.
When you eventually go to apply for a business checking account or credit card or to establish trade credit a vendor, you’ll likely be asked for either your EIN or your social security number. If you rely on your SSN in these instances, the credit history you earn through those lender or vendor relationships will most likely be applied to your personal credit history—not to your business credit report. So obtaining and using an EIN is truly critical to the process of building business credit.
You can apply for an employer identification number online in less than 10 minutes, so don’t skip this important step to establish your organization’s business credit.
Created and managed by business credit reporting agency Dun & Bradstreet (D&B), DUNS—short for Data Universal Number System—is a worldwide numerical identification system for business entities that creates a unique nine digit code for every business registered with the program.
Though it’s sometimes compared to a social security number for businesses, DUNS is unique in that it’s not managed by a government agency, it isn’t limited to the United States (or any specific country), and obtaining a DUNS number isn’t a legal requirement for any business entity.
Even so, it’s worth going through the steps to register for a DUNS number early in the life of your business—particularly because doing so can go a long way toward helping you establish business credit. You also need a DUNS number if you ever plan to apply for an SBA loan or compete for government grants or contracts, and many private vendors also require a DUNS number to extend trade credit.
You can register for your business’s DUNS number online through Dun & Bradstreet’s Company Update portal. The process is free and only takes a few minutes, though you’ll need to provide such basic information as your company’s legal name and address, your contact information, number of employees, and whether you are a home-based business. Once you apply, it might take up to a month or more to receive your DUNS number by mail or email.
Keeping your business and personal finances 100% separate is an absolutely critical part of building your business credit. That means separate bank accounts, separate credit cards—if you stop through Target to pick up a few things for both business and personal use, those should even be split into separate transactions! And the starting point of that impenetrable wall between your personal and business spending starts with a business bank account.
Sift through some of your best business checking account options to find your business’s perfect home-base for its finances. Whether you open a business account at your personal bank or choose a separate institution, go ahead and open this account as soon as you can.
But don’t forget! When asked for either your social security number or your business EIN in the account application process, be sure to use that employer identification number that’s specific to your business. You’ll want to follow this guideline with each and every account you open over the life of your business to make sure the financial history you build is always credited to your business entity.
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Of all the vendors your business will eventually contract with, the phone company should probably be among the first. Not only does this create a simple trade credit relationship that will be reported to credit agencies, some business credit bureaus will actually look to the listing of a business phone number as part of their verification process.
Whether you set up a dedicated landline, a cell phone, VoIP services, or even a Google Voice number—make sure to have that number listed in public directories, and use it consistently when working with other vendors and creditors.
As you start the process of learning how to build business credit, you’ll inevitably face the same dilemma as a young adult just starting out: You need credit relationships to build your credit history, but you need a solid credit history to be extended any credit!
This time, though, as you learn how to build business credit, you’ll have the benefit of your personal credit history as the business owner, which can be relied upon as an indication of your creditworthiness until you can establish your business credit history.
However, even as vendors pull your personal credit report in order to extend you business credit—make sure that when it comes time to report your payment history, they do so to a business credit agency using your EIN. This will ensure that those positive payments are actually applied to your business credit report.
Keep the priority of building up your business credit top of mind as you cultivate these key business credit relationships.
From heavy equipment to raw materials for your product or service, ingredients for your restaurant, wholesale merchandise, or even consulting services—chances are that you’ll be working with third-party vendors at some point over the life of your business. Many of those vendors operate on trade credit, meaning they provide a product or service for you up front and bill you through an invoice later on.
Technically, trade credit is considered a lender relationship. In fact, for the purposes of building your business credit, it is really no different than a business loan! However, in order for all those trade credit relationships you establish with your vendors to count toward building your business credit, you have to make sure that your payment history gets passed along to those business credit reporting agencies.
When selecting any supplier with whom you will have an accounts payable relationship, ask up front whether they plan to report your payment history to a business credit bureau. Some don’t do so as a matter of practice but will if you specifically request it.
In addition to those large-scale business expenses, the day-to-day operation of your company undoubtedly involves many smaller one-off and recurring costs. Paying for those smaller expenditures with a business credit card lets you manage your expenses easily while also building up your business credit.
To maximize the benefit of a business credit card while minimizing the cost, treat your credit card spending as if it were cash. Don’t spend money you don’t have, and pay off your business credit card bill in full each and every month. This simple practice could be the single best thing you do to quickly build excellent business credit.
Use the Fundera credit card finder to select the best card for your business needs, and don’t forget to list your EIN and business phone number when you apply!
The ability to take out a small business loan may be among the reasons that you are researching how to build business credit—but did you know that a business loan can itself serve to give your business credit a boost?
Almost all banks—as well as most online lenders—routinely report their borrowers’ repayment histories, and consistently making your business loan payments is a core tenant in how to build business credit.
Keep in mind, however, that certain online alternative lenders—in particular, merchant cash advance companies—tend not to file reports with credit agencies, so it’s a good idea to ask your potential lender about their policy before you apply.
You understand the basics of how business credit reporting works, and you’ve put the structure in place for your business credit history to recorded consistently and accurately. Congratulations! You are well on your way to building up your business’s credit history.
But wait! You don’t just want to build a credit history for your business that’s extensive and accurate—you also want that history to be a positive reflection on your business. In the long term, a well-documented history of late payments and financial missteps would be far worse than having no business credit at all!
The only way to build a positive business credit history is to make sure you’re managing your business finances responsibly. First and foremost, that means consistently paying vendors on time—or better yet, early! While things like length of credit history and keeping your business credit utilization (the proportion you’re spending on credit cards and lines of credit compared to your overall credit limit), payment history is by far the greatest determining factor in whether you develop a positive business credit rating.
Despite the effort that you put into building your business’s credit, chances are that at least in your first few years of business, your personal credit history as the business owner will remain an important determining factor in your business’s ability to obtain financing. At the end of the day, lenders decide which funding applications to approve based on the risk of borrowers not paying back what they owe. So, when you haven’t been in business for very long, your personal credit history as the business owner is the best thing lenders can rely on.
That means even as you learn how to build business credit, you can’t let your personal credit fall by the wayside. Building or maintaining a solid personal credit score should be considered a business priority.
Enhance your business’s financial standing by practicing sound financial management in your personal life as well as your business. Pull your credit report online regularly and check it for any inaccuracies. Keep your balances low on personal credit cards, and pay every bill—from your mortgage to your car payment and even medical bills—on time, every time. Don’t do the hard work to build up your business credit only to be held back by missteps in your personal finances!
Although doing the work to learn how to build business credit can feel a little bit like starting over, remember the good news: You get to do so with all of knowledge and experience that you didn’t have as a doe-eyed and impulsive 18-year-old! A lifetime of experiences both good and bad has prepared you to manage your personal and business finances the right way—and to reap the rewards of those smart choices as you build up near-perfect business credit.
Establish your business correctly from the start, follow the guidelines you’ve already learned, and then give it time for your credit history to take effect. Building business credit isn’t an overnight process, but as you gain access to better and more valuable funding opportunities for your business, you will find that the effort was worthwhile!