Building business credit is a smart move for small business owners because it opens doors to financing and builds instant trust with third parties. But how do you get started? It’s likely easier than you think. Read on for a step-by-step guide to establishing business credit.
How does business credit work?
Business credit works much like personal credit, except the credit bureaus report on the activity of businesses rather than individuals. The three main business credit bureaus are Dun & Bradstreet (D&B), Experian, and Equifax. Each collects information on the credit accounts of businesses and creates reports others can request. As a result, if you own a business, third parties such as lenders, suppliers, investors, vendors, and potential partners may look to your business credit reports to vet you.
What types of information get reported on business credit reports? Each credit bureau’s reports are a bit different but they commonly include:
- Company profiles: A business’s name, address, time in business, number of employees, business identification number, key personnel, etc.
- Proprietary credit ratings: A lineup of credit ratings. For example, one of Dun & Bradstreet’s ratings is the D&B Delinquency Score which predicts the likelihood that a company will pay its bills in a severely delinquent manner on a scale of 1 to 100.
- Payment history: The payment history of a business’s trade lines, which is a credit bureau’s report of the customer’s payment history on their credit account established with a vendor, supplier, or lender, including their timely and delinquent payments.
- Collections: Records of payments that have gone to collections, including the dates they were closed, disputed amounts, and collected amounts.
Credit summaries: A summary of your total credit amount, bankruptcies, liens, judgments, collections, past due payments, credit history age, and more.
For example, check out this D&B sample business credit report.
How to build business credit (step by step)
Not sure how to start building credit for your small business? Here are the key steps:
- Register your business with the Secretary of State
- Get an EIN from the IRS
- Open a business bank account
- Apply for a D-U-N-S number
- Consider a secured business credit card
- Consider vendor/supplier tradelines
- Consider a business loan
- Make on-time payments and track the results
- Fast-track with Lili and D&B
Register your business
First, you’ll want to consider registering your business. Registration with a state government is generally required if you plan to operate as a structure other than a sole proprietorship or general partnership. You may also need to register for certain permits and licenses. Check with your local and state authorities. Further, if you’re a sole proprietor and want to do business under a different name, you’ll typically need to file a fictitious business name with your state.
Get an EIN
Next, you should get an Employer Identification Number (EIN). An EIN is a nine-digit number the IRS uses to identify the tax accounts of businesses. While only federally mandatory for certain types of business, EINs are often required if you want to open a business bank account, obtain credit accounts, and apply for business licenses. You can apply for one free through the IRS website.
Open a business bank account
You’ll also want to open a business bank account if you haven’t yet. A dedicated business bank account is important for credit purposes because it enables you to receive loan funds via direct deposit and make payments to credit accounts. It’s also common for lenders to request your business’s bank statements to verify your revenue.
Apply for a D-U-N-S number
All three business credit bureaus report business credit information and provide business identification numbers, but they don’t all work the same. Experian and Equifax only create business credit reports for companies once they’ve received tradeline information for those companies from third parties. D&B, on the other hand, allows you to add yourself to its database by requesting a D-U-N-S number. You can apply for free on the D&B website and will typically get it within 30 days. Once registered, your business will be established with D&B and third parties will be able to confirm that it’s an active business.
Consider a secured business credit card
Once your business is set up and registered, it’s time to start building positive credit records. However, it can be hard to get approved when your business doesn’t have any credit history yet. A good way to break in is to get a secured business credit card that reports to one or more business credit bureaus. You’ll need to deposit collateral upfront to gain access to the credit line, but it can be worth it to establish your company’s first credit account. If you manage the account well, some card providers will eventually return your collateral and “graduate” your company’s account to unsecured status.
Consider vendor/supplier tradelines
Another way to build a positive credit account is through vendors and suppliers. If you partner with either, you can ask if they offer net payment terms and report to one or more business credit bureaus. If they do, you’ll be able to obtain the products or services and then pay for them by the allowable due date — often 30, 60, or 90 days later. The extra time you’re given may be considered credit and can help you build a positive payment history, as long as you make your payments by the agreed-upon deadline.
Consider a business loan
Business loans can also help you build business credit. To qualify, you’ll often need steady personal and business cash flow, a year or so in business, decent personal credit, and, perhaps, a personal guarantee. If your company is brand new and doesn’t have cash flow yet, startup loans also exist but can be harder to get. You can find business loans from online lenders like OnDeck, traditional banks, credit unions, or financial companies that offer invoice financing. However, when choosing a lender, ensure it reports credit accounts to the business credit bureaus.
Track the results
If you want to keep tabs on your accounts and business credit growth, it can be more difficult than tracking personal credit reports because you’re not entitled to free reports each year. Here’s how it works:
- D&B: D&B offers credit report monitoring services through three D&B Credit Insights tiers that range from $0 to $149 per month.
- Experian: You can purchase your company’s CreditScore Report for as low as $39.95 or opt for ongoing monitoring through the Business Credit Advantage subscription for $189 per year.
- Equifax: Business credit reports aren’t for sale or automatically available but you can contact the company to request yours if you’re applying for credit and are concerned about inaccuracies.
Start your business credit journey
The key to building strong business credit is proving that your business is able and willing to make credit payments on time. It’s better to have fewer credit accounts that are always paid on time, than more accounts with occasional missed or late payments. As long as you meet all your payment obligations, it won’t be long before your business credit starts growing and you can reap the benefits.
What benefits can you expect? Learn 4 key ways business credit can help your small business (with real-life examples from other SMB owners).
