How to Build Business Credit

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Nearly all of us have heard of someone financing a small business on personal credit cards just to keep the doors open until they become profitable.

It’s a scenario that’s frowned upon by financial advisors and credit professionals alike, but it’s one that happens all the time regardless. The U.S. Small Business Administration reports that more than 65% off all business owners use credit for business purchases, but only 50% of those cards are actually in the business’ name.

A much sounder approach to financing a small business begins with establishing good business credit early on, so that when a cash injection is needed there are better options available.

Developing credit history for a new business is not nearly as challenging as it may seem. “It’s easy for businesses to establish business credit, a lot of people just don’t know how to do it,” says nationally recognized financial advisor Chris Bridges, a certified consumer and business credit expert. “You have to get out there and get some accounts opened.”

Dedicated to raising awareness of credit and its impact on people’s lives, Bridges says it’s a matter of simply taking it one step at a time. If you’re wondering how to build business credit for your small business, here are some of the critical first actions recommended by finance and credit industry professionals.

Establish a Federal Employer Identification Number and Then a DUNS Number

This is a one-two punch that constitutes some of the basic, initial groundwork for a new business. A federal Employer Identification Number is used to identify a business entity. And it’s the number used to register with business credit bureaus such as Dun & Bradstreet.

A DUNS number, meanwhile, issued by Dun & Bradstreet, verifies the existence of a business entity globally. It’s also the number businesses are often required to provide when applying for corporate credit.

Don’t Neglect Your Personal Score

When it comes to lending money to a new small business, the business owners’ personal credit score is often part of the equation. It’s one of the few barometers of credit-worthiness available to banks and other lenders when a business is first getting off the ground.

“There’s a lot to be said about building business credit, but when you get down to getting funding, you will always have to use your Social Security number,” explains Bridges. “You can build business credit regardless of personal credit, but the two will eventually meet somewhere… And you want to position yourself to take advantage of opportunities. Good, strong personal credit will take you further as a small business, it will open up more financing opportunities.”

Act Like a Business

When advisors say act like a business, they mean establish accounts in your business’ name, not your personal name. This begins with simple things such as utility bills and leases. It also includes perhaps obtaining a credit card in your company’s name at such places as Staples, Home Deport, or Quill. Each of these small actions helps build your company’s credit profile and history.

“In the early stages, you might need to personally guarantee payment,” says Karim Chehade, Experian’s director of small business. “But the more you establish your business’ name and that information gets reported to us from creditors, the more likely it is you will be able to negotiate and secure better terms for financing, without having to offer personal guarantees.”

Start Early

Don’t wait to apply for business credit cards or credit lines with vendors and suppliers. It’s one of the first steps to take. Businesses with bragworthy credit histories and scores followed this important rule. And again, the simplest way to do this is to establish a store-based credit line.

An important note here. When selecting a company to establish a credit card or credit line with, make sure it’s one that reports to the credit bureaus. Otherwise, the line of credit is not helping to build your business’ payment history.

“Begin with a starter account, with a vendor or a supply company such as Quill or Fed-Ex. In 30 days you have to pay that bill and the information is reported to credit bureaus,” says Bridges.

Pay Your Bills On Time

This seems like a no-brainer, but it is critical, says Chehade.

“Stay current with all agreed-upon terms. It’s very simple, but our experience working with small business owners is that they have so much on their plate,” Chehade explains. “If there was one thing they had to do, I would say make sure they are paying their bills on time. If they are doing that, then the probability of having a negative report goes down.”

A Final Bit of Advice

Get into the habit of continuously monitoring your company’s credit profile, recommends Experian’s Chehade.

What constitutes regularly exactly? About once a month. Check your credit report every 30 days and correct outdated or erroneous information. You can also create alerts so that you’re notified by email of any changes made in your business’ name.

There is no magic number or specific timeline in terms of how long it takes to establish a credit history for your business. Obtaining a business credit card and business identification numbers are the quick part. Developing a specific (and good) credit score takes a bit longer. There needs to be a payment history that credit reporting agencies can use to establish your company’s score.

Bottom line, says Bridges? Get started as soon as possible.

“You’ve got to owe someone. That’s the main message here. You can’t establish business credit without opening at least one account,” she says.

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