How to Establish and Build Business Credit

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Estimated reading time: 5 minutes

While many small business owners choose to use their personal credit when first building their company, a business should have its own separate credit profile to successfully grow their business credit score.

Establishing and building your company’s business credit not only helps attain business loans, lines of credit, and lowers business insurance and interest rates, but business credit can help you qualify for government/corporate contracts and raise money from investors.

So what’s the best way to establish and build your company’s business credit file? There are several important ways:

Choose a Business Structure and Register Your Business Entity: In order to make your business a legal entity, you need to select a type of business structure, such as an LLC, LLP or corporation. Keep in mind that sole proprietorships do not create separate business entities.

Once you form your new business entity, the next step is to register your business. This is contingent upon your specific structure and where your business is located. While formal business registration with the state is not always required to complete business transactions, it is a very good idea for small business owners.

For example, in order to open a business bank account, you must provide proof that your business is a registered business with the state. And business bank accounts are important when it comes to separating your personal and business transactions as well as managing your cash flow. It also looks more professional to provide clients with a business name versus a personal one.

In addition, you must prove that you are a business when applying for small business loans and business credit cards. Most lenders and investors will require your business registration before approving you for a loan or credit card.

Obtain an Employer Identification Number (EIN): Just like your social security number serves as your identification number for personal taxes, your Employer Identifying Number (EIN) serves the same purpose for your business. Registered businesses need an EIN with the IRS and the state in which they are based. This not only ensures the legitimacy of the business entity, but also proves that the business is paying taxes and reporting income to the government.

Open a Business Bank Account: Once you have an EIN, you should open a business bank account in your company’s name. This is vital for developing a clear distinction between your business and personal expenses.Additionallyyour banking interactions are crucial in your company’s funding potential because business bank accounts function as a bank reference on all of your credit applications. And these banking relationships also inform lenders about your creditworthiness and history during funding reviews.

After opening a business account, be sure to use it only to pay for business expenses. These expenses—which can include rent, utilities, and business phones—help in building business credit. It is important to note that many small business lenders commonly seek borrowers with business bank accounts that have payment history for several years.

Build Credit with Vendors and Suppliers: Consider building business credit by applying for net terms with vendors and suppliers. This is helpful because purchasing supplies and inventory on credit will be reported to business credit reporting agencies. In addition, these relationships serve as a trade reference for future credit applications. Be sure to choose vendors and suppliers that report to a business credit reporting agency, so you can reap the benefits of a strong, ongoing relationship that will help your credit rating.

Stay on Top of Your Business Credit Reports: Monitoring the three major business credit reporting agencies (Experian, Equifax, and Dun & Bradstreet) will allow you to stay on top of your business credit history. While some entrepreneurs might believe that monitoring one reporting agency is sufficient, it is important to note that each agency gathers information from various places, and consequently, could obtain different information about your company. In the event that you discover inaccurate information on a credit report, you should immediately contact the business credit bureaus to make the change.

Establish a Business Address and Phone Number: A dedicated business address and phone number helps to solidify your business’s existence and allows you to register with business directories, such as the Better Business Bureau and Angie’s List. Not only do these directories require businesses to have an address and phone number, but many business credit reporting agencies gather information from these directories. As a result, it is imperative to list consistent contact information in these directories.

Connecting a phone line for your business also develops a credit relationship with the phone company. This history will be reported to credit agencies and can assist in establishing business credit. In addition, having a physical address for your business creates trust and credibility among your clients and provides your business with a more polished, professional image.

Always Make Payments to Creditors on Time: Because every credit bureau considers your history of paying creditors, make sure your payments are on time—or even early—to ensure a good credit score. Additionally, use your credit cards and lines of credit, but never max them out. Try to limit your credit utilization to 20 – 30 percent of your credit limitResponsible borrowing habits include drawing from a mix of business credit accounts and paying these accounts on time and in full.

While establishing and building good business credit profile requires time and effort, it’s very important for small business owners. Taking the necessary steps to build small business credit will definitely create more financial opportunities for your business. And strong business credit translates into a smart safety net for your business—today and in the future.

Get started by forming your business online.  Then we can work with you to establish and build your business credit.  We’re here to answer your questions and guide your business to success. Form your free LLC today! 

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