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How to Build Business Credit

Matt D'Angelo
Matt D'Angelo

If your business is new and doesn't have a credit history, use these eight tips to start building your business credit score.

  • New businesses need to build credit because good credit scores make it easier to obtain financing and may qualify them for better terms from vendors.
  • Regardless of your business's legal structure, building credit starts with getting your business properly established and opening bank, credit card and vendor accounts.
  • Paying your bills on time is critical to building and maintaining good business credit.
  • This article is for new business owners who haven't established business credit and want tips to help them start building it.

Small business finance often mires personal investment and credit with business purchases and expansion. By establishing a business credit score, you can take an important first step toward creating a dividing line between your business and personal finances, even if you're running a sole proprietorship or partnership.

What is business credit, and why is it important?

Business credit is a major financial tool for your business. It's used to help you qualify for loans and other forms of financing. It's also an essential tool for building relationships with vendors and other business-to-business (B2B) sellers. Business credit can function as a useful bargaining or negotiation tool when you enter into price and service discussions with other businesses. Overall, it's a major indicator of how healthy and reliable your business is financially. Without business credit, your company will struggle to find loans, apply for credit cards, establish relationships with vendors and succeed as a small business.

Having good credit is always the goal, but when it comes to business credit, it's also important to understand how bad credit can affect your business. The most impactful aspect of business credit is your ability to secure financing. If you have bad credit, you won't be able to qualify for loans, credit cards and other types of financing. This can be catastrophic for a new business on the cusp of growth. Yet, according to Nav, 82% of small business owners don't know how to interpret their business credit score. When you understand your score and maintain it at a high level, you're on your way to running a successful business.

Here are five benefits of having good business credit:

1. Financing is cheaper.

Having a good business credit score allows you to not only qualify for loans and other financing but also get lower interest rates on those loans. This means the price for borrowing is lower, which, in turn, saves your business money. Especially for loans from conventional banks, having a good business credit score can be one of the most important aspects of obtaining a loan with favorable rates and terms. [Read related article: How to Get a Bank Loan for Your Small Business]

2. Vendors may not require prepayment.

With certain B2B products and services, you may need to prepay. If you have a solid business credit score, these vendors and service providers may not require you to put any money down to get started. That means you can better manage your business's cash flow when establishing services. While this may seem like a small advantage, this kind of perk can have a major financial impact on your business's operations.

3. Suppliers and lenders may agree to better terms.

Your credit score can act as a bargaining chip when it comes time to negotiate deals with vendors and suppliers. If you have a good credit score, you may be able to talk down prices, extend contract lengths or, if you're seeking financing, lower your interest rate.

4. It facilitates the separation of personal and business finances.

One overlooked benefit of understanding your business credit score is the ability to divide your personal and business finances. Small business owners often invest a lot of their personal assets and savings into their business. In many cases, this is the nature of building a small business.

Part of building your business, however, is slowly separating your personal financial commitments from your business financial commitments. By establishing a business credit score, you're taking one of the most important initial steps in doing this. Especially in a business world where most lenders require their borrowers to sign personal guarantees, having a business credit score can be essential to limiting your personal exposure on business-related ventures.

5. Your business will be financially stable.

Long-term success in business means building on a conservative financial basis and taking risks when new expansion is necessary. To achieve and maintain a good credit score, you need to develop certain financial habits. That means you'll be saving money, planning your financial future and creating a stable and sustainable company. Having and maintaining a good business credit score means building a successful, long-term company.

Key takeaway: Having a good business credit score has several advantages, including better financing options and vendor terms that ease cash flow.

How to build business credit

The importance of a good business credit score is unparalleled, but how can you build a good credit score from the ground up? The first step is to establish your business legally and file with various business credit reporting agencies. The second step is to develop good financial habits to maintain your credit score. Finally, you'll want to monitor your score throughout the year to ensure your score accurately reflects the positive financial habits you're developing.

Here is a detailed step-by-step guide to building business credit:

1. Establish your business.

The first step toward building business credit is to establish your business legally as a sole proprietorship, corporation, partnership or limited liability company. Create a legal name, and set up a business phone number, which will give your company added credibility with vendors and the government. Once the basic legal aspects of your company are created, begin opening accounts with vendors that report to the credit bureaus to establish your business credit file and start building credit. As with legally creating your business, this makes your company known to business credit reporting agencies.

2. Register your business with your secretary of state.

Depending on the type of business you establish as a legal entity, you may have already completed this in step 1. It is important, however, to confirm that you've completed all of the steps required by the secretary of state to ensure your business has been registered and created properly.

3. Get your EIN.

Your EIN, or employer identification number, is like your business's Social Security number; it's what the government uses to identify your business. Your EIN is also a major piece of information for paying business taxes throughout the year. By requesting this number once your business is registered, you're gaining a corporate ID number that you will use to file taxes, open a business bank account and apply for business licenses.

4. Open a business bank account.

Get started on separating your business finances from your personal finances by establishing a business bank account. Setting up this type of account will also help you get a business credit card and begin building a relationship with a banking partner that may be beneficial down the road if you need a small business loan to grow your operations.

5. Continue building relationships with vendors.

As you build your business, continue establishing and building relationships with vendors, and create contracts for supplies and other business materials. You build credit by paying on time or early with vendors that report to credit agencies. Not all do, and not all vendors report to the same credit agencies. Consider what your business needs, then look up which vendors in that vertical report to credit agencies.

6. Use your business credit card.

Opening, using and paying off business credit cards is another way to build business credit. Once your bank account is established and your business is in operation, open a business credit card and use it each month. Research which credit card is best for your business. Some cards may offer rewards that can be advantageous for certain types of businesses. Keep in mind that, especially if you've just started your business, your credit limit may be rather low when you start out. As you build your credit score, your credit limit will increase.

7. Pay early and often.

One of the most powerful tools you have when building credit is simply paying your bills. By paying your bills in full and on time, you're proving that you can make good on your debts. If you pay bills early, however, you may be able to build your business credit score even faster. Credit is essentially an agreement between you and a lender that you'll pay them later for a product or service (or access to money, in the case of credit cards) you need now. So, when bills come due, make sure you pay them. This is the most basic concept behind building credit.

8. Focus on credit utilization.

An important aspect of building a credit score is credit utilization. Much like with personal credit cards, business credit cards have a recommended usage so you can maximize your credit score. It's recommended that a business owner use no more than 30% of their total credit limit. This proves to lenders that you're not only financially responsible but more than able to meet your minimum balance each month.

Key takeaway: New businesses can build credit by legally establishing the business, opening credit accounts with a bank and vendors that report to the credit agencies, and paying their bills on time.

How to maintain business credit

One of the most important steps of building a good credit score is maintaining it once you reach the level you want. Paying bills on time or early and establishing good relationships with credit card companies are two of the easiest ways to maintain your business credit score.

However, it's important to keep in mind that part of building good credit is developing strong financial habits: saving money, paying bills and taxes on time, making informed financial decisions about the future of your business, and developing good relationships with suppliers and other businesses. While these aspects may not directly affect your credit score, they feed into the holistic financial experience your business needs to exemplify.

Another crucial aspect of maintaining your business credit score is monitoring it to ensure it's accurate. Occasionally, businesses must dispute errors and other issues on their credit report that don't accurately reflect what really happened with a certain financial transaction. Monitoring your business credit score isn't difficult, but it's important to understand the best way to go about doing it.

Where to check your business credit score

Some third-party sites offer companies notifications when their credit scores change at the big agencies. This can be a good option for monitoring your credit score throughout the year. Another option is to check with individual business credit reporting agencies on your own. It's not complicated to do so, but you may have to register directly with the agencies, which include Experian, Dun & Bradstreet and Equifax.

Key takeaway: To maintain your business credit score, you must continue to build healthy financial habits, such as paying your bills and taxes on time. You should also monitor your business credit score for accuracy.

Bottom line

Having a business credit score is essential to running a financially viable and healthy business. It proves to lenders and other businesses that your company is financially healthy and capable of making important payments. It will not only help you get loans but can also provide you with opportunities to avoid prepayment. As a negotiation tool, a good credit score can help you drive down prices or obtain more favorable interest rates and terms on financing packages from banks and online lenders.

The best way to build credit, once your business is legally established, is to pay your bills on time – and early where possible. By opening credit cards and keeping your credit utilization below 30%, you can further establish a favorable credit rating. Keep building your company's financial reputation, and check in with the major credit agencies from time to time to ensure your credit score is accurate.

Key takeaway: Building and maintaining good business credit requires you to consistently demonstrate that you are capable of repaying your debts.

Matt D'Angelo
Matt D'Angelo,
Business News Daily Writer
See Matt D'Angelo's Profile
I'm a staff writer for Business.com and Business News Daily. I cover various small business topics, including technology, financing and marketing.