A Comprehensive Guide to Establishing Business Credit

Maintaining positive cash flow is one of the biggest challenges of running a small business. When the flow dwindles to a trickle, you might need to borrow to cover the gap. Taking out loans could also be necessary if you need capital to fund an expansion project. 

Good business credit can make it easier to qualify for loans and lines of credit while enjoying favorable interest rates. If you’re new to building business credit, it’s important to understand how it works and what you can do to achieve a good credit rating. 

Importance of Business Credit

Business credit serves a similar function to personal credit, in that it can help you to qualify for loans or lines of credit when you need to borrow. Having a good business credit history can also make it easier to get approved for credit lines through your vendors and suppliers.

Being able to access credit and financing as a business owner can play a part in your overall success. For instance, if a customer doesn’t pay their invoice on time and you need cash to cover payroll for your employees, you could leverage your good credit rating to access a short-term loan. Likewise, being able to purchase supplies or obtain vendor services on credit can make it easier to manage your business cash flow.

Good business credit can also save you money when you borrow. The better your credit rating is, the more likely you are to qualify for the lowest interest rates on loans and vendor financing.

How to Check and Monitor Business Credit Scores

If you would like to check your business credit profile and credit scores, you have a few options. It’s important to keep in mind that each of these companies may collect and organize information about business credit in different ways. 

Dun & Bradstreet

Dun & Bradstreet (D&B) offers free access to credit reports and scores to businesses that have a credit file. To build a credit file with Dun & Bradstreet, you’ll first need a data universal numbering system (DUNS) number. This is a nine-digit number that’s used to identify your business. You can apply for a DUNS number for free through the D&B website. 

Once you’ve done that, you can access your D&B PAYDEX score through CreditSignal. You’ll also get free credit monitoring when you sign up. PAYDEX scores range from 1 to 100 and specifically focus on past payment history. A higher score indicates that your business is more likely to pay its bills on time.

Equifax Business

Equifax furnishes business credit reports for businesses in a variety of industries, including financial services, healthcare, manufacturing, and retail. The Equifax Business Credit Report is designed to help you spot current and future credit risks that could impact your business.

A monthly free credit score is available through Equifax Core Credit. You can also view your updated Equifax Business Credit Report. You’ll need to complete the contact form on the Equifax website for more information.

Experian Business

Experian offers instant online access to small business credit reports. You can check business credit for your company or another company by entering the company name and address.

If you’d like to check your credit regularly, you could also consider enrolling in Experian Business Credit Advantage.

Steps to Establish Business Credit

If you’re ready to establish business credit, it helps to know where to start. You can follow these steps to create a business profile.

1. Register the Business and Obtain an EIN

Registering your business with the proper authorities makes it legal on paper. Whether you’re required to formally register can depend on your business structure and the laws that apply in your state.

You may also need to apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS). The IRS uses this number to identify your business for tax purposes. You can apply for an EIN on the IRS website. 

2. Open a Business Bank Account

A business bank account is not necessarily a prerequisite for establishing business credit, but it’s good to have for a few reasons. Having a separate bank account for your business adds legitimacy to your venture. It also makes it easier to keep business expenses separate, which can be helpful at tax time. 

You may need to provide your EIN to open a business bank account. It’s also helpful to check minimum opening deposit requirements, as well as fees and other account features, when deciding where to bank. 

3. Establish a DUNS Number

As mentioned above, you’ll need a DUNS number to build a business credit profile with Dun & Bradstreet. You can request this number online for free.

You don’t need to request any special identification number from Equifax or Experian. The credit bureaus can begin building your business credit profile once companies that you borrow money from report your account activity.

4. Consider a Business Credit Card

Business credit cards are designed to make it easier to purchase the things you need to keep your business going. You can typically get approved for a business credit card based on your personal credit scores, and you don’t need to have any business revenue to qualify.

As you compare business credit cards, remember to consider:

• Rewards, if the card has a rewards program
• Fees, including the annual fee and foreign transaction fees
• Annual percentage rate (APR) for purchases and balance transfers

Your initial credit limit may be low, but you could increase it by making on-time payments and paying your card in full each month.

5. Establish Vendor Credit

If you’re new to building business credit, then getting a small business loan might be out of the question for the moment. However, you may be able to get approved for credit lines through your vendors or suppliers.

Also referred to as trade credit, vendor credit lets you buy the things you need from your suppliers and pay for them at a later date. If your vendors report to Dun & Bradstreet or one of the credit bureaus, your account history can help you to build business credit. 

Strategies to Improve Creditworthiness

Creditworthiness is a measure of your reliability when it comes to repaying debts that you take out, either personally or for your business. When discussing what that means for small businesses, it’s important to cover the “five Cs of credit.”

The five Cs of credit refer to five criteria that lenders can use to measure creditworthiness. They are as follows:

• Capacity: Capacity refers to your business’s ability to take on debt and repay it, based on your current and expected future cash flow.
• Capital: Lenders also measure creditworthiness in terms of capital, meaning how much skin you have in the game when it comes to financing your business.
• Collateral: Collateral is any asset that you’re able to pledge as security for a business loan. That can include inventory, equipment, or real estate.
• Conditions: When lenders reference “conditions,” they’re talking about the overall state of the economy, and how your business is expected to fare financially. 
• Character: Character reflects who you are as a business owner and a person. It can include things like any professional certifications you hold, your past experience with running a business, and your overall reputation in the local community.

How you improve creditworthiness can depend on which of the five Cs needs the most attention. For example, you might take steps to cut expenses and improve cash flow if your capacity doesn’t look that great on paper. This could convince a lender that your business has the ability to repay any debts it might take on.

Tips for Maintaining a Good Credit Profile

Maintaining good business credit isn’t that different from maintaining good personal credit—both hinge on using credit responsibly. As you build business credit, these tips can help you to maintain your credit score:

• Avoid taking on excessive amounts of debt that you can’t afford to repay from cash flow.
• Keep credit utilization on business credit cards low, ideally below 30%.
• Pay bills on time, including payments on debt and payments to your suppliers or vendors. 
• Monitor your business credit regularly to look for any changes to your credit file that might negatively impact your score.

Establishing business credit can take time, and it’s important to be consistent when practicing good financial habits. If you’re working on improving your credit score to obtain a business loan, remember that there are other factors that a lender can consider as well. Your time in business, annual revenues, and the industry that you’re in may all influence your ability to get financing.

The Bottom Line

Building business credit is something that business owners may want to consider if they hope to apply for loans or vendor financing at some point. While you could use personal loans or credit cards to fund your operations, small business loans and lines of credit may offer more favorable terms. If you need to borrow while you’re still in credit-building mode, it’s worth shopping around to compare the best business loans.