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You may own a business, but just because you’ve hung out your shingle doesn’t mean you’ve established any business credit.
It takes time — and some smart moves — to build a strong business credit score, which is similar to your personal credit score in that it allows potential creditors to judge what kind of a credit risk your business poses.
For established firms, a higher business credit score could mean you’ll have better access to loans and lines of credit, lower interest rates and cheaper insurance premiums. Since your business credit report is public (available for a fee), your potential clients or suppliers may use it when making a decision whether to do business with you.
When you’re just starting out and you apply for a small business credit card, you’ll have to rely on your personal credit for approval, which may be impacted when the issuer pulls your credit report. But once that line of credit is open, it remains separate from your personal credit, meaning it won’t impact your personal utilization score, an especially important factor if your business runs up big monthly credit card bills. Remember, though, the issuer still can come after you personally if you default on your business card.
Let’s look at the five steps you should take to build your business credit.
Step 1: Getting Started
After you’ve established your business you should next incorporate or form an LLC, or limited liability company, the credit bureau Experian says. Much like with personal credit scores, Experian is one of the credit bureaus for business credit, along with Equifax and Dun & Bradstreet, which is the big dog of business credit bureaus.
Next, you should obtain a federal Employer Identification Number. It’s a nine-digit number the Internal Revenue Service uses to identify businesses for tax purposes. Think of it as a Social Security Number for your company.
Then, sign up with Dun & Bradstreet to get your D-U-N-S Number, which is short for Data Universal Numbering System. It establishes your company’s D&B credit file and also serves as a business identifier. You can get your nine-digit D-U-N-S Number for free.
Finally, open business checking and savings accounts and set up a dedicated phone line in your legal business name. Make sure that phone line is listed, too, Experian advises.
Step 2: Apply for a Business Credit Card
There are many good reasons for an entrepreneur to get a business credit card (we recently counted five.), but one primary reason is to begin building your business credit file. Most issuers will report both positive and negative information on your payments and credit usage to the business credit bureaus.
That’s not true for all business creditors, so be careful about who you take out loans or lines of credit from in the early going if you want it to help establish business credit. Equifax, for example, says it requires financial services companies with at least 500 customers to report to them on a monthly basis. You may want to ask any supplier that extends you credit if they report to the bureaus, as Experian says of the more than 500,000 suppliers extending credit, only about 10,000 report.
You’re going to want a business credit card that fits your company’s spending needs. If travel is a big part of your business budget, applying for a business travel rewards card — like The Business Platinum Card from American Express OPEN — should be on your to-do list. If you spend more on office supplies or advertising services, there may be another choice that’s better suited to your company, such as the Ink Business Cash Credit Card. No matter your business’ spending, there’s a perfect credit card for every type of bonus rewards category.
Step 3: Check Your Business Credit Report Regularly
The federal government requires the credit bureaus to furnish your personal credit report to you free of charge once a year. That’s not the case with business credit reports. Be prepared to pay a fee. You’ll want to check your business credit reports for the same reasons you check your personal credit reports: To find and fix errors, to look for evidence of fraud and to keep an eye on what might be dragging down your business credit score.
Business credit reports show similar types of information as a personal credit report with regard to a business’ debt repayment, but they also show public records like bankruptcies and tax liens.
Here how a typical business credit report is broken down:
- Credit: Number of trade experiences, balances outstanding, payment habits, credit utilization and trends over time
- Public Records: Recency, frequency and dollar amounts associated with liens, judgments or bankruptcies
- Demographic Information: Years on file, Standard Industrial Classification (SIC) code and business size
Each bureau will use this data to help generate a business credit score, which generally ranges from zero to 100. That’s different than personal FICO scores, which range from 300 to 850.
The closer your business’ credit score is to 100, the better. A score near 75 is ideal. Experian says the average business credit score is 62.
You can check your business credit report as often as you’d like (or have the budget to pay for). Checking your business credit report does not affect your business credit score, as pulling your own business credit report is considered a soft inquiry.
To view your business’ credit score or report, you’ll typically have to pay a fee or order a subscription offered by one of the bureaus. Experian offers a credit report starting at $39.95, while Dun & Bradstreet offers unlimited access to your business credit report and score starting at $149 per month. It also offers a free service called CreditSignal, which gives you alerts when your scores or reports change, but doesn’t give you access to the full reports themselves. Credit monitoring services like Nav will give you free access to a summary of your credit report, although you’ll still have to pay to see your full report.
Step 4: Always Pay Your Creditors on Time
When it comes to your personal credit, your payment history makes up 35% of your score. The business credit bureaus aren’t as generous in disclosing how their algorithms determine your business credit score, but Experian makes clear your payment history is a big deal, as it’s the No. 1 factor it lists in improving your score:
“Pay your creditors on time. Historical payment behavior with previous creditors plays a major role in determining your business credit score.”
But Experian also says paying your bills on time isn’t the only factor and lists other elements that go into your score, including:
- The presence of derogatory public records on the business profile, such as collections, liens, judgments and bankruptcies
- The status, recent status, frequency and dollar amounts of any applicable liens, judgments, or bankruptcies
- An increased trend in slow payment of obligations
- An increase in the number of business credit inquiries or applications that are generated by the business or owner
- The number of trade experiences, balances outstanding, payment habits, credit utilization, and trends over time
- Years in business, line of business or Standard Industrial Classification (SIC), size of business and other demographic data
Step 5: Improve Your Credit Score
Your business credit score isn’t static, and the credit bureaus advise that they can fluctuate for reasons not associated with your on-time payments. Your score may fall, Equifax says, if there are negative changes to the factors that go into the score, such as a lien filing.
It may also fall if you close any of your business cards, just as might happen to your personal credit score if you close a personal credit card.
Negative marks on your business report may remain in place for some time, according to Experian:
- Bankruptcies remain on file for 10 years after the filing date
- Judgments for seven years after the filing date
- Tax liens for seven years after the filing date
- Collections remain on file for six years and nine months after the last report date
- UCC filings for five years after the last filing date
- Bank, government and leasing data for 36 months
- Trade data for 36 months after the last report date
- Credit inquiries for nine months
Just as with your personal credit score, you can improve your business score by decreasing your credit utilization — pay off balances, open new lines of credit or ask for a larger credit line — and, of course, continuing to pay your bills on time, if not sooner.
In the case of Dun & Bradstreet’s PAYDEX score — that’s its version of a business credit score — a 100 means you’ve consistently paid your creditors 30 days before the bill comes due. An 80 means you’ve paid on time.
You can also improve your score by getting unlisted suppliers or financial vendors added to your credit report. Experian’s Business Credit Advantage subscribers can ask the bureau to contact non-reporting suppliers and ask them to report your on-time payments.
You may not know the precise formula that determines your business’ credit score, but you have enough information about what helps and hurts to establish or change your behavior for the better. The bottom line, though, is that if you always pay your bills in full and on time and you don’t have any major financial black marks — like a bankruptcy — your business credit should look just fine to both creditors and suppliers alike.
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