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Updated Sept. 3, 2024
Many business owners are surprised to learn that just like they have a personal credit score, their business does, too. Business credit is a track record of a business’s fiscal responsibility.
Investors, financial organizations, and other companies use this business credit profile to determine whether your business is a suitable candidate for loans or a partnership.
Strong businesses need extra funding to improve their cash flow or expand and grow their operations. If you are looking for funding for your business or expect to get funding in the future, you will want to start building business credit.
Business credit measures a business’s creditworthiness. Banks, lenders, and other financial institutions use it to assess a business’s creditworthiness and the risks associated with extending credit.
It works similarly to your personal credit, which allows you to access loans, credit cards, and other financial products.
Business credit is typically scored from 0 to 100, but there are credit reporting bureaus that use the FICO Small Business Scoring Service, which ranges from 0 to 300.
Three major business credit bureaus assign business credit scores: Dun & Bradstreet, Equifax, and Experian. They calculate their scores based on payment history, credit utilization, historical data, and amounts owed. Some also include your personal credit history in their calculation.
However, there are specific scores that consider only one factor. For instance, Dun & Bradstreet PAYDEX business credit score only considers your business payment history when assessing your creditworthiness.
You can check your business credit score by obtaining reports from one of the three credit bureaus mentioned.
What qualifies as a strong business credit score varies from one reporting agency to another.
For instance, Experian’s Intelliscore has five risk categories:
Meanwhile, Dun & Bradstreet Paydex score has three:
But generally, 75 is considered a good credit score.
There are several benefits to having strong business credit, such as:
One of the most significant benefits of having business credit is gaining access to funding.
Generally, you must have a decent credit score to get a loan with a good rate or lines of credit from vendors and suppliers.
This will be helpful when it comes time to purchase additional equipment and inventory, as you can use your credit to purchase items. Suppliers will be more comfortable forgoing prepayment and allowing you to purchase on credit if you have a great credit score.
The higher your score is, the easier it will be for you to secure funding. A good score can also get you favorable terms like higher credit limits and lower interest rates.
Even if you don’t need additional funding right now, there’s a big chance you will need it later. Having business credit will make it easier to get funding when you need it the most.
Building business credit is also important because it separates your personal and business finances. Many small business owners use personal credit to run their businesses. However, doing so could put you at risk if your business is in trouble.
There is a concept called “piercing the corporate veil,” where courts disregard the limited liability granted by entities like corporations and limited liability companies (LLCs) if their owners fail to maintain a clear separation between their personal and business finances. When this happens, the court can hold you, the owner, liable for any debts it incurs.
If you continue to use your personal credit for your business, you risk damaging your score. Your credit score takes a hit whenever your business misses a payment or defaults on a loan.
This setup will make it difficult for you to apply for credit cards and even mortgages in the future.
A good business credit score may help you get lower insurance rates.
Establishing business credit can take months or even years. But with a strategic approach, you can speed up the process and give your business a good credit score. Below are some steps you can follow to get you started:
Since business credit can only be established for legal entities, you must incorporate your business as an LLC or corporation if you haven’t already.
The process and requirements for incorporation vary depending on your state and chosen entity. Consult your Secretary of State for the specific guidelines and filing fees.
An Employer Identification Number is a federal tax identification number the IRS uses to identify businesses. You need an EIN to file taxes, hire employees, and open business bank accounts.
EINs are free, and you can get them on the IRS website.
Opening a business bank account is the first step to building business credit. You can choose between a business checking or savings account, depending on your needs.
To open a business account, you’ll have to provide the following information to your chosen bank:
The Dun & Bradstreet Number, or DUNS number, is a nine-digit code creditors use to identify businesses. You need a DUNS number to apply for business credit, get government contracts, and conduct business abroad.
You can get a DUNS number using the DUNS website. It takes about 30 days for them to process and approve applications.
Getting a business credit card can help you build business credit fast. But if you’re having trouble applying for one, you can get a prepaid credit card. It’s an excellent way to get a revolving credit line easily.
Once you get a business credit card, you must maintain a credit utilization ratio below 30%.
Credit utilization refers to the amount of credit you’ve used and the amount left. Maintaining a low ratio demonstrates that you can manage your credit responsibly.
You can achieve this ratio by paying off your balances or avoiding maxing out your credit lines.
Net30 accounts allow you to purchase goods for your business on credit, which you must repay within 30 days. Paying off your net30 accounts on time will help you increase your score.
Most suppliers require businesses to have separate Net30 accounts, so businesses typically register for only one with suppliers they often work with.
A judgment refers to a court’s decision on a lawsuit, while a lien is a legal claim against a property as payment for a debt.
Judgments and liens can negatively impact your credit score, making it difficult to improve your business score. That said, you must avoid them at all costs.
If you have specific accounts you no longer use, keep them open. Credit bureaus often include your business credit history in their calculations, meaning a closed account could negatively impact your score, even if you have a relatively good payment history.
Timely payments are crucial to building strong business credit. Every bill you pay using your business bank account contributes to your credit score, so you must pay them on time. This way, your credit score will improve over time.
Lastly, the best way to establish good business credit is by regularly monitoring it. This strategy lets you identify errors early on, dispute incorrect information, and track your creditworthiness.
You can use several free tools to monitor your business credit score, like Dun & Bradstreet Credit Signal and Nav. However, these free services have their limitations. Investing in paid services is best if you want full access to your business credit report.
When you use Inc Authority to start building business credit, you’ll be enrolled in our BizCredit Express program, designed to help you rapidly build business credit for your new or existing business.
You’ll also get a dedicated business credit coach to register and set up your business profile with Dun & Bradstreet and Experian Business. Your personal credit expert and proprietary web tools will help you maximize your credit score and profile with major business credit reporting bureaus.
With our simple process, you can start building A+ business credit in as little as 90 days and have easy access to small business loans, credit lines, and working capital.
Incorporating is the most powerful thing you can do to legitimize your startup. And at IncAuthority.com, our setup LLC services are 100% free. Always. So, don’t wait. Form your new LLC today and enjoy the protection due to you and your business under the law.
Incorporating is the most powerful thing you can do to legitimize your startup. And at IncAuthority.com, our setup LLC services are 100% free. Always. So, don’t wait. Form your new LLC today and enjoy the protection due to you and your business under the law.
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