Building your business credit: 5 steps to success

Sep 22, 2019

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Although many business credit cards allow you to apply based on your personal credit score and Social Security number, established businesses should be building credit with a dedicated business credit score. A higher business credit score could mean 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 also use it when deciding whether to do business with you.

Having business credit will also help you keep your personal and business finances from impacting each other in the long run. With that in mind, let’s look at steps you should take to build your business credit.

Getting set up with a business credit profile

If you have an established business with vendors and suppliers, you may already have a business profile. Check all three business credit bureaus — Dun & Bradstreet, Experian and Equifax — to see.  If you don’t, there are a few things you have to do before requesting business credit in your company name.

  • Incorporate your business or form an LLC (Limited Liabilty Company)
  • Apply for a federal Employer Identification Number, which is a nine-digit number the IRS uses to identify businesses for tax purposes. Think of it as your company’s Social Security number.
  • Open a business bank account in your legal business name.
  • Set up a dedicated phone line in your business name and make sure it is listed.
  • Register 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.

Once you’re all set up with a registered business, you can start building your credit score.

Step 1: Apply for a business credit card

There are many good reasons for you to get a business credit card, and one of them is to begin building your business credit file. Of course, business credit cards also help you save money and earn rewards on everyday business expenses, and many of the top cards come with welcome bonuses to incentivize business owners to sign up.

For example, frequent business travelers can earn up to 100,000 points with The Business Platinum® Card from American Express during its current limited-time offer after they spend $25,000 total on purchases in the first three months.  For everyday business expenses, Chase offers a lineup of cards that offer rewards for different business spending categories. Right now the Ink Business Preferred Credit Card comes with an 80,000-point sign-up bonus after you spend $5,000 on purchases in the first three months, and it has an affordable $95 annual fee.

Whichever card you decide is best for your business, just make sure you’re paying your bills on time and keeping your utilization as low as possible to help build your business credit score.

Step 2: Work with vendors that report to the credit bureaus

Not all business suppliers and vendors report your payments and lines of credit with business credit bureaus, so be careful about who you take out loans or lines of credit from 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 do.

Of course, a budding business can’t always finagle a situation where every vendor reports. As long as the lion’s share of your suppliers and vendors are reporting your payment history to a bureau, you will be well on your way to building a strong credit profile.

Step 3: Always make payments on time

Credit cards often charge high interest rates if you don’t pay off your card each month, which wipes out the worth of your earned rewards. Therefore, we at TPG always suggest paying off your balance in full every month. When it comes to business credit, paying all of your creditors (whether they be credit card issuers, vendors, banks or other lenders) on time is incredibly important.

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. (The exact quote is: “Pay your creditors on time. Historical payment behavior with previous creditors plays a major role in determining your business credit score.”)

Step 4: Keep your credit utilization low

Credit utilization is the amount of credit you are actively using compared to how much you have available. Similar to your personal credit score, utilization is a factor when determining your business creditworthiness. Whenever possible, keep your utilization ratio low across all of your business credit lines.

For a long time, 30% was considered the “magic number” you wanted to keep your credit utilization below. While it’s true that the lower the ratio, the better for your score, there is no hard rule as to how much of your credit line(s) you should be using. Just make sure you are being mindful of how much of your available credit you are utilizing across your business credit cards and open lines of credit with vendors and suppliers.

(Photo by Hero Images / Getty Images)
Keeping your utilization ratio low can help you keep your business score healthy. (Photo by Hero Images/Getty Images)

Step 5: Regularly check your credit report

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’s 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 uses 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’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 score.

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. Just keep in mind that you may have to pay a fee to pull your report. The federal government requires the credit bureaus to furnish your personal credit report to you free of charge once a year, but that’s not the case with business credit reports.

Improving a low business credit score

So what can you do to improve your score if it’s lower than you’d like for it to be? Unfortunately, there is no “quick fix” to building a strong credit report. It takes patience and consistent proof to creditors that you are reliable. We’ve discussed how on-time payments is a top factor when determining your score, but Experian lists the following as additional factors:

  • 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.
(Photo by gpointstudio/Shutterstock)
(Photo by gpointstudio/Shutterstock)

Your business credit score isn’t static, and the credit bureaus advise that it can fluctuate for any of the reasons listed above. 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 ahead of time. 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.

Bottom Line

You may not know the precise formula that determines your business’ credit score, but you should now have enough information about what helps and hurts to establish or change your behavior for the better. The bottom line 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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