Establishing business credit involves similar principles to building personal credit: make timely payments on loans and credit cards, maintain low credit utilization, and avoid collections. However, business credit scores are rated on a different scale and monitored by various bureaus than personal ones. Successful businesses often use Other People’s Money (OPM) to expand, and good business credit is crucial to obtaining it. Lenders rely on business credit scores to determine whether a company is reliable enough to repay debts. A low score can limit growth opportunities, while a high score can provide more options for expansion.
Personal vs. Business Credit: What’s the Difference?
Personal and business credit may seem similar, but they are different. Personal credit reflects an individual’s financial situation and how they manage their financial obligations, including credit card usage, loans, payment history, and economic challenges like bankruptcy or foreclosure. On the other hand, business credit is separate from an individual’s personal credit and is used by lenders to assess the risk of a business before making a lending decision. This includes historical payment behavior, credit utilization, outstanding balances, history of collections, liens, or bankruptcy, and company profile demographics, such as age, employee size, and industry risk.
How Does Business Credit Work?
Think of a business credit score as a Yelp review for a company’s financial trustworthiness. Lenders use business credit scores to determine if they want to lend money to a business. Business owners who don’t repay their loans are bad for a lender’s bottom line, so lenders prefer to do business with people who have a demonstrable history of paying back money owed.
“Business credit works like personal credit,” says L. McKinley, a certified financial planner and owner of MNM Vested, LLC in suburban Houston. “The more you pay on time, the better your business profile will look.”
The higher a business’s credit score, the more likely that company is going to be able to receive funding at a lower APR. Credit extended to a business can be used to pay payroll, purchase inventory, create a financial safety net, and cover many other essential company needs. Even if a business has healthy savings, using OPM is preferred by many owners.
A decent business credit profile is the first step in receiving funding from major lenders and building a thriving company. A good business credit score can help business owners qualify for better interest rates and enable small businesses to obtain credit without needing a personal guarantee, which reduces personal liability.
However, roughly one-in-four businesses surveyed by the National Small Business Association claimed they needed more funding, frequently preventing them from growing their businesses. In a capitalistic society, if a company can grow, it’s likely to succeed.
Establishing Business Credit: A Step-by-Step Guide
To establish business credit, business owners should take a few key steps. According to experts, these steps include:
- Register the business with local and state governments and set up a business name.
- Form a limited liability company (LLC) or incorporate to create a separate business entity.
- Obtain a federal Employer Identification Number (EIN).
- Use the EIN to open business bank accounts, credit cards, loans, leases, and utilities in the business’s legal name.
- Set up a dedicated business phone line listed under the business’s name.
Once these steps are taken, business owners must ensure their business is getting credit. Andrew Lokenauth, an adjunct professor of entrepreneurship at the University of San Francisco’s School of Management and founder of Fluent in Finance, advises business owners to establish a line of credit with their vendors or suppliers. Business owners can build their business credit by asking vendors and suppliers to report payment history to credit reporting agencies.
How to Build Business Credit Without Using Personal Credit
To build business credit without relying on personal credit, business owners should open credit cards or loan accounts using a business tax ID number instead of a social security number. By doing so, payment activity will be filed on the business credit report, and the business credit profile will be built.
Experian’s Bond stresses the importance of separating personal and business credit. This ensures that financial challenges on one credit profile do not affect the other. The owner’s honor will also be affected if a business becomes at risk. Therefore, separating business credit from personal credit is critical for business owners.
Who Monitors Business Credit?
Dun & Bradstreet, Equifax, and Experian are the three major agencies monitoring and recording business credit.
While Equifax and Experian create credit reports for individuals and businesses, they do so separately, and the results are compiled based on different sources of information. According to Bill Ryze, chartered financial consultant and a board advisor at online loan marketplace Fiona, this is.
Dun & Bradstreet calculates only business credit scores.
What Is a D-U-N-S Number?
“Get a D-U-N-S number ASAP,” advised Lokenauth. “It’s the initial step in establishing your organization’s D&B credit record.”
A Data Universal Numbering System, or D-U-N-S number, is a unique nine-digit number assigned by Dun & Bradstreet. Anyone who wants to do business with you can look it up to determine your business’s creditworthiness. A D-U-N-S number is also required to apply for government awards and agreements or Small Business Administration advances, according to Lokenauth.
A business established as a legal entity can apply for a D-U-N-S number for free on the D&B website.
It can take up to 30 days to get your D-U-N-S number. Once established, your business will be rated by D&B and assigned a PAYDEX score, similar to a FICO score but for companies, says Lokenauth.
How Long Does It Take to Build Business Credit?
To generate a credit score, Experian requires certain minimum information, including at least one tradeline and demographic element. Once a business owner has either of these reported, a business credit report and a credit score are established.
According to Experian, establishing a business credit file can take just weeks and sometimes as little as a few days. This depends on when Experian sees a public record or contributed data validating that the business is legitimate.
But establishing a good score won’t happen overnight. “Understand that business credit cannot be built fast, and anyone promising this is a grifter,” warns Lokenauth.
“Business owners can start seeing business credit improving within a short period, but it’s more likely that they’ll see improvements over time as they build up good payment histories,” said Bond. “Often, it can take business owners one to three years to build up business credit histories depending on how active they are at leveraging credit and proactively taking steps to build credit.”
To build and maintain a good business credit score, owners should pay their financial obligations on time, report trades, and regularly review their business credit report to be sure the information is accurate and up-to-date, said Bond.
McKinley noted that establishing a good score requires a long period of payment activity. “The more credit history, the better,” he said. “There’s not much credit history established in the first year of payments.”
How to Check Your Business Credit Score
A good credit score is essential for any business looking to secure funding or establish credibility with potential lenders. Here’s how to check your business credit score with the major credit reporting agencies.
Experian
To check your business credit score with Experian, you’ll first need to register for a business credit file with the agency. Once you’ve done that, you can access your credit score by logging into your Experian business credit report. There is a fee of around $40 to check your score.
Experian also offers a monitoring service called Business Credit Advantage. It provides business owners unlimited access to credit reports, tools to manage and grow their credit scores, and automatic alerts for inquiries or derogatory filings. The service also includes identity monitoring to detect stolen business information and compromised confidential data online.
Equifax
Equifax allows businesses applying for business credit to request a copy of their business credit report with their application. To do this, you’ll need to reach out to an Equifax representative and initiate a request for the information. You’ll also need to provide documentation proving that you are an authorized company representative and requesting the report and an application for business credit. There is currently no cost associated with requesting a business credit report directly from Equifax.
As part of its report, Equifax gives a business several different scores, including a business payment index, which rates your business’s payment history; a business credit risk score, which determines how likely you are to pay bills in the future; and a business failure score, which rates the likelihood of a business shuttering within the following year.
Dun & Bradstreet
Dun & Bradstreet issues a PAYDEX score for your business credit score. To check your PAYDEX score, you can purchase a business credit report from D&B for $61.99. D&B also offers monthly subscriptions for building and monitoring your business credit, ranging from $15 to $199 monthly.
It’s worth noting that consumers can also access their business credit scores for free on the website Nav.
What Is a Good Business Credit Score?
Business credit scores range from 0 to 100, with 100 representing the highest score or lowest risk of missing payments. A score of 75 or above is considered good, according to Ryze. Business owners should strive for a higher credit score to ensure they have access to the options and resources needed to help their businesses thrive.
Summary
A good business credit score is essential for securing funding and establishing credibility with lenders. Building your score up takes time and diligent payment habits, but the rewards will be worth it. By checking your credit score with the major reporting agencies and monitoring it regularly, you can stay on top of your credit and ensure your business has the resources it needs to succeed.