6 Ways to Build Business Credit
By Dina Gerdeman Grace | American Express® Freelance Contributor
6 Min Read | September 06, 2022
Summary
Building a solid business credit score is critical, since it shows lenders and other businesses your company is financially stable and trustworthy, which in turn convinces them to do business with you.
Specifically, a strong business credit score can help a company obtain lower insurance premiums, land contracts with vendors, suppliers, and other businesses, and secure loans, lines of credit, and other types of financing with lower interest rates and more favorable payment terms. Meanwhile, small businesses with low credit ratings often find that conventional lenders, such as commercial banks, decline to extend credit to them.
Since a good business credit score is considered a major indicator that your business is financially healthy and reliable, it’s important to work at building your business credit. This step-by-step guide explains some best practices for building and maintaining a strong business credit profile.
1. Form a Business Entity
To create a business credit profile that is separate from the owner’s personal credit record, form a business entity that can start building its own credit history. By registering as a limited liability company (LLC), limited liability partnership (LLP), or corporation, a business is considered its own legal entity separate from an individual and can enter into its own contracts.
However, as the Small Business Administration (SBA) notes, if you operate as a sole proprietorship, your business is not considered legally separated from you, so if the business applies for financing or credit, those records will be linked to you and will appear on your personal credit reports.[1]
Separating the business is key to reducing an owner’s personal risk. In the case of a sole proprietorship, the owner may be held personally responsible for any business debts, lawsuits, and other liabilities, according to the SBA.
As part of setting up a business entity, you can create a dedicated business phone line in the company’s name and add a listing for it. And through the Internal Revenue Service (IRS) you can establish a tax ID number – also called an Employer Identification Number (EIN) – which is the business equivalent to a Social Security number.[2] This EIN can be used to apply for credit cards and open business bank accounts, allowing a company to build a credit history separately from that of the owner.
2. Keep Close Tabs on Your Business Credit Scores
Several business credit bureaus track the payment histories of companies and use this data to generate business credit scores. The four main business credit rating agencies are Dun & Bradstreet (D&B), Experian, Equifax, and Fair Isaac Corp.’s Small Business Scoring Service (FICO SBSS).
Each business credit bureau uses a different formula for calculating scores based on a variety of data indicating a company’s ability to meet its financial obligations, such as payment activity, outstanding balances, the amount of debt and credit utilization, and public records like bankruptcies, deeds, and liens. The company’s size and industry risk may also factor into business credit scores.
Similar to personal credit reports, business credit reports change regularly as new data is added. But unlike personal credit reports, which can only be viewed by someone with a “legally permissible purpose” under federal law, anyone can access a company’s business credit report, including lenders and other businesses.
You can take a proactive approach to protecting your business credit by closely monitoring your business credit profiles on a regular basis. Order copies of your company’s credit reports and review the information closely to make sure it is accurate. If you notice any errors, fraudulent activity, or outdated information, you can contact the business credit reporting agency to request changes.
3. Seek Creditors that Report Payment Information
One of the main building blocks of a business credit report is the business’ payment history, which Experian points out is key information credit rating agencies use to predict whether a business is likely to pay its debts on time in the future.[3] As the business borrows money to buy supplies and other company materials, its debt totals and the payments it makes on loans are reported to business credit reporting agencies. The longer a business’ payment history reflects on-time payments, the higher its score is likely to climb.
However, not all suppliers, credit card companies, and other financing entities share payment information with business credit bureaus, so it’s worth asking lenders whether they report to these agencies before you pursue accounts with them.
To build a solid business credit profile, consider establishing multiple accounts with lenders that do report payment data. For instance, you can build ongoing relationships with certain suppliers that report to agencies by asking them to extend trade credit, which means they allow you to pay for the items you ordered days or weeks after you receive them. With “net 30” accounts, you have 30 days from the invoice date to pay for the products you ordered. You can continue to add more accounts as the business grows.
4. Pay Bills Early
Paying creditors on time is vitally important to earning a positive credit rating. When you secure loans, take a close look at your providers’ payment terms, then set calendar reminders to make sure you’re paying all bills on or before their due dates. Alternatively, you can set up autopay processes that automatically transfer payments from the business’ bank account.
In fact, you may boost your business credit score by paying creditors early. The D&B PAYDEX Score, for instance, is based on a scale between 1 and 100, with higher scores awarded to businesses with a reliable history of making on-time and early payments.[4] A business that consistently makes payments on time may have a PAYDEX score of about 80, whereas a business that regularly pays an average of 30 days early may generate a perfect score of 100.
On the flip side, late payments can negatively impact a company’s PAYDEX score. Business credit reports indicate Days Beyond Terms (DBT), which shows how many days beyond the due date a payment was made. Your business credit score can take a hit even if you are just a few days late in making payments.
5. Keep an Eye on Credit Limits
Business credit scores depend in part on credit utilization, the amount the business is using of the total credit a lender extended. Lenders often consider a business with a high credit utilization rate as riskier because it calls into question whether the company will be able to repay its debts. Experian advises trying to keep balances on credit cards and credit lines relatively low, at about 20% to 30% of their limits.[5]
If a business has good credit, it may improve its score even more by requesting a credit line increase to lower its credit utilization. For instance, a $5,000 balance on a $20,000 line of credit may allow you to earn a higher score than the same balance of $5,000 owed on a $10,000 line of credit.
6. Pay Down Debts
The fastest way to boost a business’ credit rating is to pay off debts, according to Experian[5]. By decreasing the balances on your business credit cards, you can make a positive impact on your company’s credit rating quickly. Also, if you have a good history of making early and on-time payments with a particular business credit card, keep the account open, since a solid track record with current creditors can help improve your score.
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