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Building Business Credit

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Lauren Ward

Lauren Ward

Updated August 25, 2020
Building Business Credit
Building and maintaining business credit is an essential part of growing your company. Anytime you apply for financing, creditors and lenders check your credit. Whether your business is newly formed and you’re wondering how to establish business credit for the first time, or you own an already established company, these tips can help you make sure your business credit is as strong as possible.

Business Credit Explained

Business credit is similar to your personal credit in that it tracks how well you’ve managed your credit and accounts, but as a separate legal entity rather than as an individual. A strong credit history helps your company qualify for financing. Somewhere down the line, you may need an injection of capital for inventory, equipment, operating expenses, or expansion. Business credit affects your approval and the quality of your loan terms when you apply to finance any of these ventures. To understand how to build business credit, first take a look at the primary factors that creditors and lenders look at. Different credit agencies may calculate scores using their own algorithms. But in general, your business credit file includes your company’s payment history, credit utilization, the size of your business, and your credit mix. 

Payment History

Like your personal credit score, your company’s payment history is one of the most important components of your business credit score. It shows you have both the cash flow and the systems in place to pay bills on time. 

Credit Utilization

Your business’s credit utilization compares your available credit to your actual amount of debt. If your business credit card is close to being maxed out, for example, your company would have a high credit utilization ratio. That can raise a red flag to lenders when applying for financing. 

The Size of the Business 

The size of your business, and in particular its revenue, impacts your debt-to-income ratio. A higher amount of revenue can remain healthy even with a larger amount of debt; therefore, the lower debt-to-income ratio your business has, the better its credit score should be. 

Credit Mix

Credit scoring agencies also weigh the types of debt your business holds, although it’s not as important for business credit scores as it is for personal credit scores. However, several unsecured credit cards as your only type of debt may eventually impact your score, while an installment loan tied to an asset and unsecured credit cards, for example, may be viewed more favorably.

Forming Your Business

Before you start building your business credit, make sure your company is fully launched. Start by choosing your incorporation type, such as LLC, S-corp or C-corp, and register with the appropriate state and local agencies. Requirements vary depending on where you live or where you are registering the business.Also, register with the federal government by getting a federal tax identification number, as it’s required for most types of businesses. This is also known as an employer identification number (EIN). Opening a business bank account is also helpful in order to make payments to vendors and creditors. 

Establishing a File with the Major Credit Reporting Agencies

Whether you’re a new or established business, it’s important to know how to open a business credit file. While your personal credit history grows as creditors independently report your credit lines and payments, business credit works a little differently. There are three separate business credit reporting agencies, and only two of them automatically begin collecting financial data when you establish credit with participating creditors. However, not all vendors and creditors report to the credit agencies. If you’re set on building your business credit report, you can ask your creditors if they submit payment history and to which agencies. Here’s how each agency works so you can start building your commercial credit. 

Equifax

Equifax’s business credit operations act similarly to its personal credit process. Once you establish your business and bank account, you may automatically begin accruing a history as you tap into credit opportunities, as long as the vendor or creditor reports to Equifax. Equifax’s Business Credit Reports offer two scores—Business Credit Risk Score and Business Failure Score. The Business Credit Risk Score is on a scale of 101 to 992, with a higher score indicating a lower risk of a “business incurring a 90 days severe delinquency or charge-off over the next 12 months.” Business Failure Score aims to estimate the likelihood a business might fail over the next year. Scores for this metric range from 1000 to 1610. Scores closer to 1000 are considered higher risk. You must pay a fee in order to access your company’s business credit file, which costs $99.95 from Equifax.

Experian

Experian also tracks business credit history and you can check to see if your company has an established report by using the BizVerify service. Experian’s small business credit scores run on a scale of 1 to 100. A higher score indicates a lower risk. You can purchase your full credit report for $39.95 to see the financial background potential creditors may see. 

Dun & Bradstreet

Unlike Equifax and Experian, you must actually register with Dun & Bradstreet in order to build a credit profile for your company there. Once registered, you’ll receive a unique D-U-N-S Number assigned to your business. In some cases, you may need to sign up for this identifier before applying for credit with certain lenders, for example if you are applying for a grant or SBA loan. Dun & Bradstreet's credit scoring also runs on a scale of 1 to 100. Scores of 80 or higher are generally considered low risk. 

6 Ways to Build Business Credit

As you establish various credit profiles for your business, you may wonder what types of accounts can help you build and possibly improve your reports. There are five primary types of credit that, when used responsibly, may be used as a part of your business credit strategy.  

#1: Business Credit Cards

Opening a business credit card can help build your business credit, but you’ll likely want to first make sure the credit card company reports to the major commercial credit agencies. Even if you don’t need the available credit for your company, opening a card is a way to build a positive payment history by making a small charge each month and paying the balance in full by the due date. It’s important to remember that using your business as the account holder doesn’t  protect your personal credit score. Running a high balance or missing payments could impact your personal credit report. Business credit cards may be secured or unsecured. A secured card typically requires a deposit but helps to establish a credit history from scratch. Alternatively, you may qualify for an unsecured card, but only be offered a small credit line when you first apply. As you continue to make your payments on time, your limit could gradually grow.No matter how much credit you’re able to access, it’s almost always wise to avoid carrying a high balance from month to month. It could lead to a high credit utilization ratio, which may contribute to a lower business credit score. Keeping your balances in check and paying off the card completely each month can help maximize your credit score.  

#2: Vendor Credit for New Businesses

As a new business, vendor credit is a type of short-term financing for specific products or services. You typically receive the goods or service upfront and then pay your bill by the designated due date. Vendor credits are typically net-30 accounts, meaning you have 30 days to make a payment. If you’re new to doing business with the vendor, you may need to make a deposit or purchase something upfront.  Using vendor credit often appears on your business credit report as a trade line. Rather than listing the specific company, each account usually appears as an industry. Check that the vendors you work with actually report to the credit agencies. Finally, pay all of your bills on time or even early if possible. Business credit works very similarly to your personal credit: on-time payments help build a positive score, while late payments can result in a score drop.

#3: Supplier Credit

Supplier credit is comparable to vendor credit. The key difference is that you receive actual inventory to sell without having to pay for it upfront. Not only can it help manage your company’s cash flow, it can also help boost your credit score—as long as the supplier reports your account to the appropriate agencies. It’s important to remember that supplier credit is a type of financing. Like a loan, you could incur penalties if payments are late. You’ll probably also need to fill out an application with the supplier. Review the terms carefully, just as you would with any other type of financing agreement. You may not want to use supplier credit solely as a way to boost your business credit. But if it makes sense from a financial standpoint, check different options to see whether they report trade lines so you get that bonus of improving your credit. 

#4: Retail Credit

Retail credit allows you to get a business credit card to use at a specific store or within a brand’s portfolio. This option may make sense if you regularly shop for supplies or products at a certain place, such as an office supply chain. It’s even better if you can earn rewards as you charge and pay off your balance.Diversifying your cards with a few different options may also improve your business credit by keeping your credit utilization low. Having one card to use for all of your charges could result in a high utilization ratio. For instance, carrying a $9,000 balance on a card with a $10,000 credit limit results in a 90% credit utilization. But if you spread that same amount over a few different cards, you may not be as close to maxing out one specific account. Of course, no matter how many credit cards your company has, it’s usually a good idea to pay off your balances in full and on time. 

#5: Service Credit

When you’re first beginning to establish your business credit, service credit is among the easiest ways to start. This refers to ongoing utility accounts for things like your company’s internet, web hosting, phones, and electricity. It’s important to open all of these service agreements in your business’s name, not your personal name, if you want to build business credit. Again, always check to see which providers report to the credit agencies and which do not.

#6. Checking Credit Reports

Regularly monitor your businesses credit report to keep an eye on any errors that may be impacting the overall score. If an error or inaccuracy pops up on the report, follow the appropriate procedures for reporting it in order to have the issue corrected. 

Final Thoughts

Building positive business credit doesn’t happen overnight. But you can successfully set yourself up for future financing by properly registering your company and understanding what type of accounts impact your credit score. Be sure to open your accounts under your business name. And getting credit only helps your score if it is well managed. That includes keeping your balances as low as possible and making your payments on time. Less than stellar credit doesn’t necessarily mean it’s impossible to get a small business loan, but doing all of these things can help you establish a solid business history that shows potential lenders that you’re capable of managing your company’s finances. It also helps to demonstrate your ability to be a trustworthy borrower. Building a strong credit history has the potential to open the door to more competitive  financing opportunities when you need them, whether that’s a small business loan to help your business grow or to weather a temporary storm. Commercial credit is an essential resource that you can tap into through various stages of growing a business. 
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20019

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.