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Guide to Establishing Business Credit in 5 Steps

business credit

You’ve just come up with the world’s best business idea–you’re going to sell a machine that lets you talk to dogs. You’ve worked out all the glitches. The only problem is you’ve built just one machine, and you don’t have enough money in your bank account to buy the materials needed to build more.

One option is to find backers who are willing to invest in your business and become co-owners. They’ll supply you with capital, but they’ll also take a share of your profit. Additionally, what if one of the potential investors wants to tweak the machine so that it talks to cats instead? It’s something you are vehemently against. You want to maintain your own vision for your new business and keep as much of the profit as you can for yourself. But you need capital. That’s where business credit comes in.

What is business credit?

Business credit is the willingness of lenders to supply a company with capital based on an assessment of its capacity to borrow and repay debt. Like personal credit, business credit is often measured with a score. Having a good business credit score can improve your ability to secure loans for your business. The higher your credit score, the lower the interest rates you will have to pay on your loans. Additionally, good credit scores can allow you to borrow more.

Four reasons to get and maintain good business credit

  1. Access to funds
  2. Protect ownership
  3. Protect personal credit
  4. Build credit for the future

There are several reasons you might choose to get business credit.

1. Access to funds

Business credit is a simple way to access funds that you can invest in your business.

2. Protect ownership

Unlike seeking out investors, securing capital through business credit does not affect the ownership of your business.

3. Protect personal credit

If your business struggles to repay its loans on time or has bad credit, this will not affect your personal credit score.

4. Build credit for the future

Even if you don’t need money right now, if you think there is a chance you will in the future, creating a business credit account can give you better borrowing opportunities in the long run.

How does business credit work?

There are three major business credit bureaus that rank businesses and assign credit scores to determine their creditworthiness: Dun & Bradstreet, Equifax, and Experian. These bureaus use factors like a company’s track record on previous loan repayments, credit utilization, and the personal credit histories of a company’s owners to create credit scores and reports for businesses. Lenders use the credit reports and scores to measure the risk of lending to your business.

How does business structure impact credit?

There are different kinds of business structures available to businesses, and each has different obligations when it comes to credit.

  • Sole proprietor. Sole proprietorships are businesses owned by a single business owner who is solely responsible for the business’s debts. Should the business go bankrupt, creditors are allowed to seize the personal assets of the business owner. 
  • Limited partnership (LP). Limited partnerships consist of multiple owners, of which only those designated as general partners are personally liable for business debts. The other partners are called limited partners. They have less control over how the business is run but are not personally liable for its debts.
  • Limited liability partnership (LLP). In an LLP, all owners of the business are considered partners, and have at least some liability protection in the case of negligence or misconduct by other business partners. However, whether the owners are completely protected from personal liability in the event of their own negligence varies from state to state. 
  • Limited liability company (LLC). An LLC is a business structure that shields a business owner’s personal assets from any claims made against the business. LLCs are required to pay special fees to both national and state governments to operate, making them more expensive to maintain. 
  • Corporation. In a corporate business structure, shareholders are not liable for the company’s debts beyond the amount of money they have invested. However, unlike LLCs, creditors can sometimes claim the company’s assets in the event of a default, wipe out shareholders’ voting rights, and change the leadership of the company. 

How long will it take to build credit for your business?

The length of time it takes to establish credit depends on many factors, including your business structure, the personal credit of you and any partners, and the business’s cash flow. For new businesses, it usually takes between one to three years to build enough credit to be eligible for small business loans. If you continue to pay back your loans on time, your small business credit will continue to grow. 

Types of business credit

Vendor credit

Most businesses need to purchase equipment, materials, or inventory from a vendor to accomplish their goals. For example, the owner of a restaurant will need to buy ingredients used to prepare meals. Sometimes, large vendors may allow business owners to create what’s called a “net 30 account.” A net 30 account gives a business the opportunity to buy materials on credit with repayment expected within 30 days. Many small businesses use these business purchases as a way to build up credit.;

Supplier credit

Similarly to vendor credit, supplier credit involves credit from suppliers to business owners buying inventory or materials for their businesses. However, supplier credit usually refers to longer-term and more complex agreements than vendor credit. Supplier credit contracts are often used in international imports and exports.

Service credit

This is credit issued for services used by the business owner. Examples include utilities like electricity, gas, water, and internet. Usually, both businesses and individuals pay utility bills after services have been issued at the end of the month. Paying service bills on time can help improve your payment history and build your credit score.

Retail credit

These are ways to borrow that are easily available to the public. Examples include bank loans, mortgage loans, and credit card loans. The better your credit score, the more of these loans you will be able to access. 

Business credit card

One of the most common ways to build business credit is through credit cards, which allow you to pay for your business expenses with a single card and pay the bill at the end of each month. Many business credit cards are available to companies with little or no credit history, which makes them an option for new business owners. However, there are credit limits for new businesses and high-interest rates if the balance on the card is not paid off in the current billing cycle, which is usually 30 days.

Five ways to establish business credit

  1. Register your business
  2. Register for a Dun & Bradstreet number
  3. Apply for a business credit card
  4. Register for relevant net 30 accounts
  5. Pay all bills on time

Building business credit is a process that can take several years, which can make it a daunting prospect. However, the following steps can raise your credit score and get you on the right path. 

1. Register your business

Before you apply for business credit, you need to register your legal business name with the appropriate government agencies. The process for registering will depend on where your business is located. In the US, you may need to register your business entity at the local, state, and federal level. Additionally, you will also need to get a federal employer identification number (EIN) from the IRS, which can be done for free on their website

The length of the registration process will depend on the business structure you have chosen, with sole proprietor registration being the simplest and corporate registration being the most complex. 

2. Register for a Dun & Bradstreet number

The Dun & Bradstreet number, referred to as the DUNS number, is a unique nine-digit number used to identify a business. Creditors in the US will ask for your DUNS number and your EIN before they agree to issue you a loan. Many other countries use the DUNS number as well to identify businesses. 

3. Apply for a business credit card

Business credit cards are a major asset when it comes to building credit. They function almost exactly like personal credit cards by allowing you to pay for your expenses using the card.

4. Register for relevant net 30 accounts

Another important way to build credit is to register for net 30 accounts, which allow you to purchase goods for your business on credit. The debt for the purchased goods has to be paid back within 30 days. Each supplier requires you to register for a separate net 30 account, so most businesses only register with suppliers that they expect to use often. Consistently paying off your net 30 accounts on time will build your credit.

5. Pay all bills on time

The key to building credit is paying bills on time and often. Every credited bill you pay out of your business checking account can contribute to your credit score, including utility bills and rent. So long as you are consistently making on-time payments, you should see your business credit score grow as the years pass.

Business credit FAQ

Does an LLC have its own credit score?

All businesses, including LLCs, have their own credit scores. However, the personal credit scores of the owners of the LLC can have some impact on the business credit score of the LLC, and vice versa.

How do I build my business credit?

For first-time business owners, the best way to build credit is by using business credit cards and net 30 accounts for monthly expenses. By paying all bills on time every month, you will see your business credit profile improve.

How do I start a line of credit for an LLC?

To start a credit line, you need to have registered your LLC through all appropriate government agencies and received your DUNS number. Once those things are taken care of, you can apply for a business credit card at any major bank or credit card company.

Does LLC debt show on the owner’s personal credit?

The business credit score of an LLC can have an impact on an owner’s personal credit score, which is why it’s useful to have your personal finances in order. The exact degree of this impact varies from case to case.

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