Business credit can help business owners efficiently run and grow their businesses. Just like personal credit, a company’s credit profile can impact its eligibility for financing and the interest rates it pays.
Additionally, business credit could factor into your business’s insurance premiums and ability to get government and corporate contracts.
How to Build Business Credit
Once you have an idea for your business, you’ll need to register or incorporate the business and open business accounts that will be reported to the business credit bureaus.
The process isn’t necessarily difficult, but it can take time and be confusing. Here, we’ve broken it down into 11 simple steps:
1. Choose Your Business’s Name, Address, and Phone Number
Once you’ve settled on your business idea, you’ll need to come up with a name for your business. This can be a fun and creative process, but there’s also a lot to consider.
You’ll want to make sure the name is available and acceptable in the states where you want to conduct business. Additionally, check the federal trademark database to make sure the name isn’t trademarked.
There are also non-legal considerations. For example, you might not want to use your personal name for the business if you plan on selling the business later. You also want to make sure the website domain and social media handles are available.
You may need to list an address and phone number as contact information when you form your business. If you aren’t opening a physical shop or office, you could use your home address and personal number, but they may appear in public records and most lenders will require a physical address. UPS offers a service that provides a physical address for your business if you don’t want to use your home address.
Once your business is formed, you’ll also want a dedicated business phone line. There are some inexpensive voice-over Internet Protocol (VoIP) services that can also be set up to automatically forward to your personal line.
The phone number can be important for getting listed in online and public directories, such as YP.com, 411, and the Better Business Bureau. You can also list your business on Apple Maps, Bing, Facebook, Google, LinkedIn, Yelp, and other popular websites.
In turn, some business credit bureaus gather data about businesses from these directories, and creditors may try to verify your business’s authenticity by checking directories.
2. Pick and Create a Business Entity
Once you have an idea and name, you have to create a business entity to build credit.
A sole proprietorship is the default business type for people who don’t create business entities. But sole proprietorships aren’t legally separate from their owners.
Sole proprietorships may be able to build business credit, which could help the business owner get financing without impacting their personal credit. However, the business owner could be liable for the company’s debts, even if the company used its business credit history to obtain a loan.
You may be able to choose from different entity types, including a limited liability company (LLC), limited liability partnership (LLP), or corporation. But choosing the right entity can be a complex decision.
The state where your business is located, the types of funding you plan on raising, how many owners there are, and your plans for the business’s future can all impact your decision.
Consider working with an accountant and an attorney to better understand the pros and cons of each entity. Someone who has experience forming similar businesses in your state may help you avoid trouble later.
3. Apply for a Federal Employer Identification Number
Your business will also need a federal Employer Identification Number (EIN), which works a little like a Social Security number (SSN) to identify your business. You’ll use the EIN to open accounts and establish credit in the business’s name.
Often, it’s best to form your business entity and make sure the name you chose is accepted before applying for an EIN.
Once you’re ready, you can apply for an EIN online with the IRS. It’s a free and fairly easy process. Additionally, you may need to register your business with the states where you’ll be doing business to obtain state tax identification numbers.
4. Open a Business Bank Account
Use your company’s information and EIN to open a bank account in the company’s name.
Having a business bank account can be necessary for keeping your personal and business finances separate. This can be helpful come tax time and important for maintaining the legal separation between yourself and your business.
While the business bank account might not be reported to the business credit bureaus, it could be a necessity for getting business financing. Most lenders require that you have a separate business bank account.
Many financial institutions that work with businesses also offer merchant services, which you may need to accept debit and credit cards.
5. Register for a DUNS Number
Dun & Bradstreet (D&B) is one of the major business credit bureaus. And many vendors and suppliers use the D&B Paydex business credit score before offering trade credit to other businesses.
Your business also needs a DUNS number if you want to become a federal government contractor or qualify for federal grants.
You can register your business for a nine-digit DUNS number, which will serve as a unique identifier for your company.
It will be completely separate from your business’s EIN. The registration is free online, though D&B representatives may contact you and offer faster services for a fee.
6. Open Accounts that Are Reported to Business Credit Bureaus
At this point, your company is set up to build business credit. If you want to establish a business credit profile, you need to open and use accounts that are reported to the business credit bureaus.
These accounts are also known as business tradelines, and there are two types of tradelines:
- Financial tradelines are extensions of credit from financial institutions. Common examples include business loans, credit lines, credit cards, and equipment leases.
- Vendor tradelines, which are also called trade credit, vendor accounts, merchant, supplier, or corporate tradelines. These are extensions of trade credit, such as a net-payment terms account with a supplier.
There are several business credit bureaus, including D&B, Experian Business, Equifax Business, Paynet, and the Small Business Financial Exchange (SBFE). A bureau might focus on one type of tradeline or keep records and create business credit reports with both types.
The types of tradelines that you want to open can depend on the types of credit you want to use in the future. For example, building financial tradelines may be most important if you want access to large credit lines and loans.
Alternatively, if you want to build vendor tradelines, you could start by opening and using net-30 accounts. These are vendor credit accounts that give you 30 days to pay outstanding invoices. Our list of easy-approval net-30 accounts could be a good place to start.
Term accounts with your suppliers can help you free up cash flow and may help you avoid borrowing money. As your business builds its credit history and relationship with suppliers, it may qualify for longer terms, such as a net-45, -60, or -90 account.
To build up your business credit, apply for these accounts only with your EIN. If they ask for your Social Security number, leave it blank. This way you can build your business credit without relying on your personal credit.
7. Apply for a Business Credit Card
One way to establish a financial tradeline is to get a small business credit card. The card will be in the company’s name, and many credit card issuers report the card and payment history to business credit bureaus.
Small business credit cards are similar to personal credit cards, additionally some offer employee cards linked to your primary account. You may be able to earn rewards and qualify for promotional interest offers. With business credit cards you often don’t pay interest if you pay the bill in full every month.
Some business credit cards don’t impact your personal credit history if you pay the bill on time. Most cards require that you sign a personal guarantee until you’ve built up your company’s credit profile. Meaning, you’re personally liable for the debt if the business can’t afford the credit card payments.
If this happens, the late payments or a collection account could be reported to the consumer credit bureaus under your personal name and hurt your personal credit.
One tip for improving your business credit scores is to ask for credit line increases on your revolving credit lines, including credit cards. Using a small portion of your available credit can be good for your scores. And it’s easier to do this when you have higher credit limits.
8. Get a Wonga World Business Account
You can also establish a financial tradeline by opening a Wonga World Business credit builder account once your business is at least three months old. The account is a secured installment loan, and there’s no credit score requirement.
After approval, a portion of your monthly payment gets set aside in a locked business savings account. You can access the funds after paying off the loan in full and can close your account at any time for free.
As you repay the loan, your monthly payments will be reported to Equifax Business and PayNet. Soon, they will also be reported to Experian Business and SBFE.
9. Use Your Business Credit Accounts
Opening an account isn’t enough. You also have to use it. Lenders and suppliers want to see that you’ve taken out loans or used trade credit and then paid your bills on time.
Having multiple tradelines is important to building good credit—it’s a requirement for some business credit scores. And considering how running a business can be unpredictable, you may want to establish both types of tradelines to be safe.
10. Pay the Bills On Time or Early
You also want to make sure you’re paying your bills on time. Similar to your personal credit, late payments can hurt your business credit scores and stay on your reports for years.
Some business credit scores will also look at how early you paid your bill. For example, the D&B Paydex score ranges from one to 100. Paying on time can get you a score of up to 80. But to get the top score, you have to pay your net-terms accounts earlier than required.
You may also want to stay on top of your personal credit. Many small business lenders will check the business owner’s personal credit before offering a loan, line of credit, or other types of business financing.
11. Monitor Your Business Credit Reports and Scores
Unlike your personal credit, you don’t have a legal right to review your business credit reports for free.
However, there are some services that give you access to certain reports or scores for free. And you may want to occasionally pay to check your other business credit reports and scores.
In addition to tracking your progress, monitoring your business credit can help you quickly spot business identity theft. In some cases, fraudsters may use your business’s credit to take out loans or lines of credit and then disappear with the money.
Changes in your business credit could be a clue. You can also monitor your business’s information with the states’ secretary of state offices to ensure no one has changed your company’s records.
If you’re looking for free score monitoring, the Wonga World Business account comes with a business credit score—the Equifax Business Delinquency Financial Score Grade—that’s updated monthly.