Updated: October 29, 2024
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Most new — and many existing — business owners aim to build their business credit scores. They also look for ways to get credit, deal with start-up costs or expand their business. Incidentally, there is a direct link between the these goals because how well you manage the credit you receive directly affects your business’s credit score. With a strong business credit history, the path to financing in the future may become simpler and more cost-effective.
Business credit operates similarly to personal credit, influencing your company's creditworthiness based on how you manage it. Good business credit unlocks better interest rates and a broader range of financing options, making it essential for both new and established business owners. Even if you don't currently require additional capital, building your business credit ensures you're prepared for future needs.
A business credit score is a numerical representation of your business's creditworthiness, ranging from 0 to 100. Unlike personal FICO scores, which range from 300 to 850, a business credit score focuses solely on your business accounts. Factors affecting your score include:
Credit utilization ratio refers to the percentage of credit you are using compared to the total credit available to you. Aim to keep your credit utilization ratio below 30% for optimal scoring. To access your business credit report, you'll need to pay a fee to the three major business credit bureaus in the U.S.: Dun & Bradstreet, Experian and Equifax.
Establishing business credit can be fairly straightforward if you know what to do.
Choose a legal structure like an LLC or corporation over a sole proprietorship to keep your business and personal credit separate.
Apply for an EIN from the IRS, which you'll use when applying for business credit and opening your bank account.
These are foundational steps that help separate your business finances from your personal finances.
Establish a business credit file by reaching out to the major credit bureaus: Dun & Bradstreet, Experian and Equifax.
Choose vendors that offer net-30 or net-60 credit terms and ensure they report your payment history to the credit bureaus.
Apply for a business credit card or line of credit to start building your credit profile. If you're a new business, consider a secured credit card.
Always pay your bills on time, as late payments will negatively affect your business credit score.
Regularly review your business credit reports to spot any errors and keep track of your score.
One way to build your business credit history is by obtaining credit for your business and repaying it on time. It's also important to keep your credit utilization ratio in check. While getting a business loan is an option, you may also consider building your business credit by getting a business credit card or a business line of credit. Both come with predetermined credit limits and require that you make at least minimum monthly payments. Both report your payment history to business credit bureaus.
You may build your business credit by making your business credit card payments on time, as these would reflect on your business credit reports.
A business credit card gives you interest-free days on purchases, meaning that as long as you pay the entire outstanding amount before the end of each billing cycle, you pay no interest. Most business credit card providers let you get additional employee cards at no extra cost. Depending on the card you get, you might benefit from high reward rates for spending across business-oriented categories such as office supplies and travel.
Business credit cards tend to simplify tracking expenses by letting you integrate your accounts with your existing bookkeeping software. Some even offer detailed category-based spending reports.
Some business cards come with no annual fees. Cards that charge annual fees typically offer higher cash back or reward earn rates as well as additional benefits such as trip cancellation and interruption insurance, auto rental collision damage waiver, lost luggage insurance, airport lounge access and priority boarding.
Issuers of business lines of credit report your payment histories to business credit bureaus, giving you the means to build business credit. Business lines of credit may be unsecured or secured, and you may expect higher credit limits when you look for secured alternatives.
A business line of credit comes with a predetermined draw period. During this time, you can access available funds in your line as often as you want. Like credit cards, the money you repay becomes available for borrowing again.
With most business lines of credit, you may choose to make interest-only payments during the draw period. Once the draw period ends, you are required to repay any outstanding amount through an installment payment plan that usually stretches from three to five years.
A business line of credit comes in handy when you need to pay billers who do not accept card payments. However, unlike credit cards, business lines of credit do not offer grace periods where interest does not accrue. Additional features and perks are hard to come by as well.
If you decide a business line of credit is the best financial solution for you, be sure to prioritize paying back your loan in a responsible manner. Making late payments or defaulting on the loan could destroy your business's credit score and make lending in the future much more difficult. — Brett Holzhauer
Now that you know how to build a business credit score and the importance of doing so, get the type of business credit that you feel works best for you. Whether you choose a business credit card or a business line of credit, take time to thoroughly compare your options.
This section answers other commonly asked questions about how business credit works.
The time it takes for you to build business credit depends on the financial needs and arrangements of your business. It usually takes two to three years to build good business credit. However, you may start noticing the effect of how you handle your business credit on your business credit reports soon after the first year.
Building business credit is not hard, provided you know how to go about the process. While you need to keep making all your payments on time, you should also keep your credit utilization ratio under control.
Listing your business on the Better Business Bureau (BBB) has no effect on building business credit. BBB is a private nonprofit organization that rates businesses across performance and reliability.
No. As long as the name on the bank account matches the name of your business, you're good to go.
Whether you wish to build business or personal credit, you need to be prudent in the way you handle your finances. Factors that affect your personal credit score include the amounts you owe, your payment history, the average length of your credit history, the mix of credit you have and your new credit accounts. The main aspects that affect your business credit score include the age of your business, number of recent credit inquiries, new credit accounts, payment history and the presence of collection activity or tax liens in the last seven years.
You may begin the process of building your business’s credit history by getting just one credit line, either through a business credit card or a business line of credit. What’s important is that the lender reports your payments to business credit bureaus.
Building business credit is very important when accessing credit for use as working capital, making large business-related purchases, expanding your business and meeting any unexpected expenses. With a good business credit score, you may be able to secure lower interest rates when you seek credit in the future.
Carrying a balance on your business credit card might not be a good idea, given that you’ll need to pay interest charges, which, in some cases, can be rather high. If you do carry forward balances, make sure you pay them off completely as quickly as possible. In addition, try to limit your borrowing to less than 30% of the credit available to you.
To effectively build credit with an EIN, you need to start by separating your personal and business finances. Going forward, you may build your business credit score by using your EIN each time you apply for business credit.
Some net-30 vendors that can help build business credit include Uline, Quill, Office Depot/OfficeMax, Grainger and HD Supply.
The credit report of a business carries all relevant information about its subsidiaries. Subsidiaries do not get their own credit reports.
You may check the creditworthiness of a business that you plan to buy or invest in by contacting the three major business credit reporting bureaus and paying the required fees. The three bureaus are Equifax, Experian and Dun & Bradstreet.
About Doug Milnes, CFA
Doug Milnes is a CFA charter holder with over 10 years of experience in corporate finance and the Head of Credit Cards at MoneyGeek. Formerly, he performed valuations for Duff and Phelps and financial planning and analysis for various companies. His analysis has been cited by U.S. News and World Report, The Hill, the Los Angeles Times, The New York Times and many other outlets.
Milnes holds a master’s degree in data science from Northwestern University. He geeks out on helping people feel on top of their credit card use, from managing debt to optimizing rewards.
