How to Build Business Credit

To build business credit, you first need to register your business and get an employer identification number (EIN) if applicable. Then, you can apply for a credit card, loan or other line of credit to begin building a business credit file with a record of your borrowing history. If you borrow responsibly and always pay on time, then positive information will appear on your business credit reports, which in turn will produce good credit scores.

Key Things to Know About Business Credit

• Credit bureaus: The three major credit bureaus that handle business credit reporting are Experian, Equifax, and Dun & Bradstreet. You will automatically start building a credit file with Experian and Equifax when you apply for a line of credit or loan, but in order to start a profile with Dun & Bradstreet, you need to apply for a “DUNS number” with them.
• Business vs. personal: The importance of your small business’s credit standing pales in comparison to your personal credit, since approval for small business credit products still hinges on your personal standing and usually requires a personal guarantee. Business credit is more important for large corporations, which have access to types of credit that don’t require personal liability.
• What credit card companies and loan providers use: All major credit card companies use personal credit data to make small business credit card approval decisions. They also relay monthly account information to cardholders’ personal credit reports and hold them personally liable for unpaid balances. Small business loan underwriting is based primarily on personal credit as well.
• What business reports are used for: Most lending takes place on the personal level. Consumers typically owe money to banks and a handful of large utility companies, while businesses tend to owe money to other businesses. As a result, business credit reports and scores are used more to perform due diligence on suppliers, rather than for loan underwriting.
• Difference from personal credit: A small business credit report contains mostly the same types of information as a personal credit report, but just for your business products. Aside from some basic, publicly-available corporate filings, the rest – largely vendor-sourced payment information – is typically provided by a limited number of participating data sources or on a self-submit basis.

Although personal credit is used more frequently, it’s still important to know how credit reports and scores pertaining to your business work and how they reflect upon your company.

What Is Business Credit?

Business credit is your business’s reputation as a borrower with lenders and vendors, which tells them how risky it is to lend you money. Your business credit history is represented on your business credit reports, which lenders can check when you apply for credit products like credit cards or loans. You also receive business credit scores based on your reports, which essentially serve as a summary of your credit standing.

Your business credit reports include information about things like:

• What types of accounts you have open
• How much you’ve borrowed
• Whether you’ve paid on time
• Liens, court judgments, bankruptcies and collection accounts
• General information about your company (how many years in business, what names it goes by, parent companies, locations, etc.)
• Other financial information like your company’s total assets and liabilities

Your business credit reports and scores can help lenders and merchants determine if your company is worth working with, or whether there’s too much risk. Your business credit might also influence the rates and credit limits you get on various products if you’re approved.

The three main agencies that track your business credit are Dun and Bradstreet, Experian and Equifax. Both Experian and Equifax also do personal credit reports, but Dun and Bradstreet is specifically business-focused.

How to Build Business Credit

The fundamental process of building credit doesn’t change based on whether you’re talking about personal credit or business credit. Either way, you still need to create a track record of responsible performance, only spending what you can afford to repay and always paying your bills on time.

There are, however, a few business-specific steps you can take to ensure your company is covered from all angles.

Register Your Business

Obviously, you can’t build business credit until your business has been formally established, whether it’s a sole proprietorship, an LLC, a partnership or a corporation. You’ll have to register in the state in which your business will operate, so the steps for this may differ depending on where you live.

Once you’ve established your business, you may also need to get an employer identification number (EIN) from the IRS. Your business needs an EIN if it has any employees or meets certain other requirements set by the IRS. In most cases, sole proprietorships won’t need an EIN.

Get a DUNS Number

Dun and Bradstreet is one of the business credit bureaus, alongside Experian and Equifax. A Dun & Bradstreet number, or a DUNS number for short, is a 9-digit number that identifies each physical location of your business. It costs nothing to get this number, and you’ll usually receive it within 30 business days.

Having a DUNS number allows both you and potential creditors to track your credit history using Dun and Bradstreet’s credit reports. You don’t need to sign up for a special number to track your credit reports with Experian or Equifax, though.

Have Both Personal & Business Credit Cards

Both personal and business credit cards can boost your personal credit standing, as both types of accounts relay information to consumer credit reports on a monthly basis. But since personal credit cards typically aren’t listed on business credit reports, it’s best not to go without a business-branded card.

Consider Opening Other Business Credit Products

While business credit cards are one of the best vehicles for building business credit, you can build credit by taking out business loans or other lines of credit as well.

You can also apply for trade credit from vendors, which means that you can pay them for goods delivered to your business over time rather than immediately upon delivery. Some businesses may report trade credit to the credit bureaus.

Pull Your Business & Personal Credit Reports

Both are considered by lenders, so both deserve your time and attention. You’ll want to check and dispute errors, get a qualitative sense of your credit standing and make sure you haven’t become the victim of fraud.

Keep in mind that while consumer credit reports are available for free on a weekly basis (and you can check your Transunion report for free daily on WalletHub), you may have to pay for your business report. You should therefore refrain from buying your business credit report out of pure curiosity and instead wait to do so unless you’re planning to soon apply for a loan.

Always Pay on Time

Missing payments on your credit accounts is the easiest way to damage your credit standing. A long string of on-time payments, on the other hand, projects financial stability. Setting up automatic payments from a bank account is the best way to ensure you’re never late. You’ll be able to choose to pay the minimum amount required, your total balance or a custom amount.

Minimize Credit Utilization

How much of your credit limit you use each month – also known as credit utilization – informs lenders about how debt-reliant you are as well as how much credit capacity you have. The lower your credit utilization is, the better your credit score is likely to be. For both personal and business credit accounts, it’s ideal to keep your credit utilization below 30%.

Regularly Self-Report to Business Bureaus

Business credit reports all rely on self-reported information to varying extents. If a particular bureau will allow you to report information about your own company, and you don’t mind it becoming public, you’ll be able to pad your file with information that you control, perhaps distracting from certain negative items that might otherwise stand out in a thin file.

Pay Your Taxes & Avoid Lawsuits

It’s not just loans and lines of credit you have to worry about when it comes to small business credit reporting. Given that tax liens and court documents are public information, they are some of the easiest data points for credit bureaus to collect about companies. They also represent major red flags.

Be Careful When You Owe Big Companies

You already know the importance of responsibly managing loans and lines of credit, whether business or personal in nature. The other main thing that can affect your corporate credit standing is vendor-reported payment information. Many large companies report vendor payment and financing data to the major credit bureaus the same way that a bank would. As such, taking extra precautions to make sure this information is positive is a must.

Build An Emergency Fund

A financial safety net helps reduce some of the risk posed by the uncertainty of the future and ensures that you’ll be able to pay your bills even when times are tough.

Why Is Business Credit Important?

Business credit is important because it can open up more borrowing opportunities for your company and help you build relationships with vendors. However, based on our experience, the business credit reporting industry is quite poorly organized and plagued by spotty information on a company-by-company basis. Much of the information contained in these reports is actually self-reported by businesses.

Although business credit reporting isn’t perfect, it’s still worth it for you to build business credit. Below, we’ll go through the major situations in which a company’s business credit standing comes into play.

• Business Loans & Lines of Credit: Your personal credit standing will be more important in most cases, but business credit may carry some weight as well – particularly if your history is particularly good or bad.
• New Customer Vetting: A business may want to perform due diligence on your company – especially if you’re a vendor – before signing a contract or purchase order.
• Trade Credit Accounts: Vendors and suppliers may give you better payment and pricing terms if you have a strong repayment track record.

It’s important to note that this characterization conflicts somewhat with what those directly involved in the business credit business say.

“Business credit information is critical for any size business that is in need of securing loans or capital. Virtually all lending institutions leverage business credit as a key factor for making decisions on commercial lending terms,” Jordan Takeyama, a senior public relations manager at Experian, told WalletHub. “We recommend small business owners take the opportunity to monitor both to ensure their credit worthiness.”

How to Check Your Business Credit Report

Unfortunately, the Fair Credit Reporting Act – the law that provides for free credit reports – applies only to consumers and not to small businesses. There is no government-sponsored program to distribute free business credit reports. The best you can get is a free summary that contains limited information from a company like Nav or through D&B’s Credit Insights tool.

You can purchase the full version of your business credit report from one of the major providers, like Experian or Dun & Bradstreet. We don’t recommend doing so, unless you know for a fact that a client or lender will be checking the same report soon, simply given how infrequently these reports are used.

You can check out sample credit reports from Experian and Dun & Bradstreet in our Business Credit Report & Score Guide.

What Happens When You Have Bad Business Credit?

Having bad credit, whether business or personal, will ultimately cost you. Bad personal credit is particularly expensive, as it will lead to worse credit card and loan terms in addition to higher insurance premiums and greater difficulty renting an apartment or getting certain jobs. It can also make it harder for you to get approved for both personal and business credit cards. Bad business credit could end up costing you a deal or complicating borrowing efforts, but its impact should be limited given how little-used business credit scores and reports are.

What to Do If You Have Bad Credit

The best thing to do in the face of bad credit is begin devaluing negative items in your credit files as soon as possible. In order to do that, you should:

1. Pull your credit reports to see exactly what issues you need to work on (e.g. late payments, high credit utilization) and determine how long the negative information will remain on your credit files.
2. Dispute inaccurate records and make up for missed payments in order to change the status of any“delinquent” accounts to “paid.”
3. Make sure you have at least one open credit card account that is in good standing, ideally a personal card that will send information to your personal credit reports, as that will help with both personal and small business borrowing. Always pay on time and maintain reasonable credit utilization so positive information will get added to your major credit reports each month, gradually lessening the impact of negative records.
4. You should also consider getting a secured business credit card. That way, you can start putting some positive information on your business credit reports as well. Plus, it’s better to not have personal and business spending on the same card.

For more great credit building tips, check out our Credit Improvement Guide.

Ask the Experts: Why Is Business Credit Reporting So Bad?

We turned to a panel of leading business and credit industry experts for a deeper look at the significant differences and similarities that exist between personal and business credit reporting. You can check out the questions we asked in addition to the experts’ bios and responses below.

1. Why do most lenders use the personal credit standing of small business owners to evaluate them for loans and lines of credit?
2. Why is “business” credit so little used?
3. What are the best things that small business owners can do to improve their access to credit?