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About 80% of new businesses fail because they lack cash flow.
Having business credit can ensure it won’t happen to you. It’s kind of essential, unless you want to crash and burn like the majority of new businesses out there.
If you’re thinking about making your side hustle into a legit business, you’re about to face a huge learning curve. Stick with our guide to building business credit, and you’ll already be beating the competition before you even start the race!
In this article, you’ll find out:
- How to establish business credit.
- Build it fast while avoiding mistakes others might make.
What Is Business Credit?
Business credit is a business’s capacity to borrow cash and secure financing. Good business credit gives access to financial products like business loans and credit cards. It affects your business’s ability to establish lines of credit with vendors, allowing you to pay later for goods and services.
That’s the basic business credit definition. It’s something you probably never really thought about before starting your business.
But here’s what really matters to you as a new business owner—
Personal Credit Vs. Business Credit—What’s the Difference?
How does business credit work, compared to personal credit? To be honest, they aren’t too different.
| Personal Credit | Business Credit |
| Tied to your Social Security Number | Tied to your EIN number |
| Credit scores are private | Credit scores are public |
| More consumer protections to challenge inaccuracies | Less legal protections to fix inaccurate reports |
| Credit scores range from 300 (bad) to 800+ (excellent) | Credit score range depends on credit agency:
Duns & Bradstreet—1 to 100 Experian—1 to 100 Equifax—101 to 992 |
Your personal credit is built when you start taking out loans, or get a credit card. The same goes for your business credit. But when you start your business, it won’t have a credit file, or score, and that means lenders will take your personal credit as the baseline.
Personal Credit Kick-Starts Your Business Credit
A healthy personal credit helps you establish business credit. (Want to improve your personal credit score? Start with Credit Karma.)
That’s because when you first start out, a lot of lenders will ask for a personal guarantee before extending credit to your business. They’ll want to do a personal credit check and use that as the basis of deciding risk.
But a lot of people have kind of sketchy personal credit. So the question is, how to build business credit with bad personal credit?
If your personal record is less than perfect, you should take some time to learn how to build credit for yourself and fix it before jumping into business.
But do you need good credit to start a business? Not necessarily.
You can build business credit without having great personal credit, if you really need to. To do that, keep your personal and business credit streams separate.
When you register your business, open a credit file for it without piggybacking on your personal report.
Most of the steps below will be the same, but make sure to apply for credit cards, and loans in your business name. That’s one of the best ways to build business credit with bad personal credit.
Think of all those new, clean, and crisp pages in your businesses credit file. Keep them that way, don’t sully them with your own past credit mistakes.
If you want to establish business credit for new businesses, but don’t want to agree to personal credit checks, you’re going to find it harder to get lines of credit.
You might find it easier establishing a line of trade credit first, and working back towards traditional lenders once you have some good credit history on file. You’ve got to be flexible when figuring out how to get business credit.
Your new business won’t always be tied to your personal history. That means it won’t suffer from any future blemishes on your own record, but it won’t take the fall for any unpaid parking tickets, either.
How to Build Business Credit from Scratch in 10 Steps
There’s no simple answer how to apply for business credit. The Business Credit Fairy isn’t waiting to rubber stamp your form in triplicate. Follow these steps to build business credit, though, and you’ll have an easier time getting where you want to be.
1. Register your business (and get insured)
So you’ve got a catchy name (maybe even the beginning of a jingle), and you’re ready to register your business.
If you’re forming an LLC or corporation, registering your business will set it up as a separate entity, and open a business credit file in its name.
You need to register to start business credit.
That’s how to open a business credit file. Without it, your business won’t exist in the eyes of the law, or lenders.
You should register with all the state and local agencies specific to your business, as well as the IRS. To register your business, you’ll need to give details like the business name, ownership, and registered agents.
Sole proprietors don’t have to register in the same way, but they can register, and I’d recommend it. The paperwork won’t be fun, but it could help you build credit in the long run.
Registering gives your business legitimacy with lenders; plenty of them won’t extend credit to businesses that aren’t registered, so it’s a crucial thing to do.
Another important item is business insurance. You need to protect against loss, and creditors will check you have insurance before giving you credit. Getting insured means your business is less of a risk for lenders, helping you to access loans and build your business credit.
2. Get your EIN number
Once you’ve registered with the IRS, you’ll be assigned an EIN (Employee Identification Number) I know, so many acronyms, but if you’re going into business, you better get used to it. Mainly, this is a business identification number for tax purposes. In order to apply for business credit, you’ll need an EIN number.
So how to build credit with EIN numbers? In the same way, a Social Security Number is tied to your personal credit, and an EIN is linked to your business’s credit file. It’s used by the Government and credit agencies to track and recognize your business.
Some business credit cards only need an EIN to apply, rather than a Social Security Number. If you’re trying to build business credit with bad personal credit, one of these could help, since it won’t be tied to you personally, but to your business.
To build business credit and monitor your business credit score, you need an EIN. Lucky for you, they’re free! And you can get one quickly by applying online.
3. Get your DUNS number
Yet another acronym. This one stands for Data Universal Numbering System. It’s a mouthful, but the name makes sense when you know that the firm Dun and Bradstreet provides DUNS numbers.
Clever (or annoying) acronyms aside, a DUNS number is a nine-digit ID that lets the Government and other companies get information about your business’s financial history and health. This ranges from a business’s payment history to any liens against the business, even its D&B credit score. It’s that important.
How to use DUNS number is easy. Every time you track your credit file, or apply for business credit, you’ll use this number to let lenders have a peek into your business credit. Since it’s a public number for every business, you can use other companies DUNS numbers to look them up yourself too.
You might be asking “do you need a DUNS number for business credit”? Guys, it’s number three on the list for a reason.
You’ll need a DUNS number so that your business looks legitimate and creditors can properly assess whether you’re a risk. Without it, you won’t get much in the way of credit because to lenders, your business isn’t fully established.
If you want to get federal grants for your business or enter Government contracts, you’ll need a DUNS number, too.
To get one, you can apply online through Duns & Bradstreet, where you’ll need to give some basic information to set up a credit file for your business.
4. Open a business bank account
Here’s the good news, you can open a business savings and checking account with bad credit, or no credit at all. The bad news? Having a bank account won’t help to build business credit by itself.
Time for another revealing stat—Lenders refused financing to 70% of businesses without a business bank account in the last two years.
You need a dedicated bank account to apply for business credit if you’re going for a loan or credit card. If you want to know how do you build credit for a business without a bank account, the answer is, with extreme difficulty.
For an LLC, it’s a requirement to keep personal assets separate from your business, but even if you’re a sole proprietor, having an account for your business is crucial.
That way, you’ll have evidence of how much your business is worth, its cash flow, expenses, and profits. In short, everything a lender will look at when deciding whether to give you a loan. There are a lot of business accounts out there, with different perks, but think about how much money you need to start your business, and plan from there.
Open the account in your business’s legal name, keep your account records up to date, and always keep your statements. Lenders will want to see them before they offer to finance.
5. Get a business loan
How does a business get credit? The same way a person does, by going to the bank, and getting a loan.
If you’re a new business you could consider a loan to build business credit from scratch. Deciding how you’re going to support your business requires some strategic thought. Getting a business loan is one option, but it’s not as easy as it looks on TV.
In 2020, 43% of small businesses applied for a loan, but 9% of them got nothing. 65% of small business entrepreneurs use personal and family savings to start up.
Sorry for the depressing stat, but you need to know finding financing for your business might be tricky.
Let’s say you’re one of the lucky few who apply for a business loan and get it, how does it help to build your business credit?
In one word, repayments.
A positive history of repayments on a loan will help your business to establish credit. Think of it like when you took out a student loan. You got the money, made the repayments, and built your reputation with the credit bureaus as someone who responsibly handles their debt. We won’t mention all the cash you blew on that beer-pong set.
Having a business loan works the same way. You build your credit by paying back on time what you owe. Simple and effective.
6. Get a business credit card
Does a business credit card build credit? Yes, it does. It’s actually one of the major ways to build business credit for new businesses.
If you don’t want to be among those 80% of business that fail because of cash flow, you’ll need a business credit card. These will help to stabilize your finances while you establish credit.
A business credit card is one of the best tools you can get for building business credit. By regularly using a business credit card, then paying off the balance in full each month, you’ll establish business credit quickly.
You can use a credit card as a business credit builder.
A business credit card will probably have a higher credit limit than your regular card. The perks will be more related to business than pleasure, too. Think extra office supplies, rather than cashback on candlelit dinners.
As with a personal credit card, apply for the credit your business needs and only what you can manage. And if your bad personal credit is limiting your options, consider a secured business credit card to start out with.
Your personal credit score will determine the limit of a business credit card until you’ve built up a payment history and business score. To do that, make sure your business card provider reports to the major credit bureaus.
Shop around and find the deal that best suits your business needs (i.e., specific retail stores, cash back options, travel perks, low APR, etc.).
7. Establish “trade-credit”
Trade credit is about paying later for goods and services you need now. It’s usually business-to-business, or B2B credit (I said you’d have to get used to acronyms).
There are different types of trade credit, but getting it can be an absolute lifeline for new businesses, where cash flow can be less stable.
If you want to know how to build business credit without using personal credit, this can be a good starting point. A lot of vendors and suppliers won’t do a personal credit check before issuing a line of credit to your business, but if they still report your repayments, bingo! You’ve started building business credit without a loan or credit card in sight.
When you’re trying to build business credit with bad personal credit, don’t aim too high. Start small, build slowly. Trade credit is one way you can do that.
How does it work?
It’s pretty simple. One company buys from another and then has a pre-determined period to pay, typically between 30 and 90 days. These are called Net-30, or Net-90 terms, and can be formal or informal arrangements between businesses.
Make sure your vendor has a trade credit account that reports to all the major credit agencies. That way, your repayments count towards your business’s credit profile.
Most vendors won’t require much more than an initial purchase or deposit to open a trade account with you, and your personal credit won’t come into the mix.
Fair warning, failing to pay vendors on time or in full is as bad as not paying your business credit card, and it can have the same negative impact when trying to establish business credit.
8. Start monitoring your business credit reports
We’ve talked a bit about your business credit report, but now let’s dig in. Starting with a few important facts. There are three major business credit agencies:
There are smaller firms, like Nav, that offer business credit services, so have a look around to find the agency which offers what you need. You’ll need to sign up to an agency if you want to know how to get a business credit score, which will be scored differently depending on what agency you go with.
Whoever you’re with, monitoring your business credit report is a good way to develop business credit.
By checking regularly, you can:
- Look for any mistakes, or fraudulent activity, and fix them quickly before they affect your score.
- Stay aware of changes to your credit file, and how they impact your report.
- Know who’s been checking your credit.
- See where you might improve.
Basically, everything you need to raise your business credit game.
You’re not legally entitled to a free business credit report, but if you sign up with a reporting agency, you’ll get a few freebies. One of which will be access to your credit score.
Every bureau collects data and assigns credit scores in slightly different ways, but they all consider your business’s payment history, public records, and financial data. This information is used to give you a score, which lenders consider when you apply for business credit.
Maintaining a good credit score is a key way to get business credit, because most lenders will use it when you apply.
9. Make payments on time and avoid liens
A quick lesson in terminology—in business, late repayments on your debts are called slow pay. Slow payments get reported to credit agencies and are visible to people who pull your file. To get business credit, avoid slow payments.
Late or missed payments on your credit report are red flags for lenders, and they stay visible on your report for seven years. That’s seven years of banks, vendors, credit card companies, and loan offices knowing that you pose a risk to their investment.
Late payments (or non-payments) will definitely hurt your business credit.
If it looks like your debts are piling up, and threatening your repayments, try using our free Debt Snowball Spreadsheet to manage your debts.
You also need to avoid liens on your business. As all you savvy entrepreneurs out there already know, a lien is a legal claim placed on your business’s assets by a lender, vendor, or supplier for repayment of money owed. You can’t sell these assets until the debt is repaid.
Kind of like a mix between a security deposit and repossession.
A lien is a legal order, with all the paperwork and records that implies. And it will really put a ding in your business credit. It’s a public court record (ding), of your failure to repay (ding), and refusal, or inability, to do so (ding, ding, ding).
Having a lien against your business will do more than hurt your efforts to develop credit. It can stop you from getting new lines of credit, or loans, cause your insurance premiums to go up, and even hurt your relationships with future vendors.
Like slow payments, liens will stay on your credit report for a while. So be smart, pay in full, on time, and avoid them.
10. Build a (better) web presence
An unorthodox step, but maybe a fun one too.
By making your business’s website, social media accounts, and blog better, you can increase the chances of getting a line of credit.
A professional web presence provides legitimacy, and it’s an easy platform for lenders to learn about your business. You’ve got to understand, lenders want to give you their money. But they don’t want to give it to a business that doesn’t understand the importance of the web or has a badly designed site that tells them nothing about the business. That sounds like a business that’ll probably fail, and take the lender’s capital with it.
A strong web presence will help you get business credit and boost your credibility as a business at the same time.
How Long Does It Take to Build Business Credit?
If you’re asking how to build business credit fast, the short answer is, it can take a while. But once you know how to start business credit, you can build exponentially on what you’ve already done.
You might have to go through some steps more than once. Maybe more than twice. It’s a long game, but there are a few ways to speed up the process.
- Make sure all your repayments, and trade transactions, are being reported back to credit bureaus.
- Sign up for a credit agency, and pull your report regularly. You won’t ding your own report by pulling it, but you can check what’s happening.
- Keep your business information current with state and local authorities, as well as creditors-if you get a new address, or even phone number, let all the relevant bodies know asap.
- Use Government help. The Small Business Administration can give you more than just a loan, they offer education and support for building your business and establishing credit.
Is it possible to build business credit in 30 days? Not really. There are companies that say they can teach you how to build business credit fast, sure. But this ignores the main idea behind credit history: the longer, the better.
That’s the big secret to how business credit works.
You can start business credit within a month, and after that begin monitoring your report and score to see areas you could improve on quickly. How long does it take to establish business credit after that? That answer is going to be different for every business, I’m afraid.
Building business credit fast is kind of missing the point. You want a firm foundation of credit to grow your business. A rushed job will cause mistakes, which will do more damage and take longer to fix.
Remember, there are no quick fixes. The only thing that can build your credit is responsible financial management.
Who Needs Business Credit?
Every business needs some kind of business credit to fund everyday operations. That can be anything from restocking your shelves to paying your staff (or simply fixing that pesky AC unit). That’s why learning how to start business credit is essential.
When it comes to how to use business credit, every business owner will be a little different. Maybe you want to expand, or find money for new staff. Maybe you have a kick ass idea for a new product, but no cash to fund it.
All need business credit to thrive and survive—no matter their business structure:
Sole Proprietorship
As a sole proprietor, you’ll be building credit for small businesses, but that business is you.
In the eyes of the law (read, the IRS), you and your business are legally the same. You’re personally liable for all debts incurred by your business, which makes you a risky prospect for lenders.
Since you’re legally the same entity as your business, you can use personal loans and credit cards to build business credit, but your personal assets are on the hook for any losses.
This isn’t a good option if you have bad personal credit. As a sole proprietor, you’ll need to use your personal history as a means to begin your business credit. You won’t have a separate credit file, or history, for your business, and any blemishes will affect the lender’s decisions.
LLC
A Limited Liability Company is where the business and its owners are legally separate entities. So does an LLC have its own credit score? Yes, that’s exactly right. Because an LLC exists away from the business owners, it has its own credit report and history.
That means, with this structure, you won’t be wholly personally responsible for debts incurred by the business.
As an LLC, your business will have its own credit file, report, and credit score, and it won’t be linked to your personal credit after establishing its own. That’s why it might be a better option for people trying to build business credit with bad personal credit.
You can check what your state requirements are for forming an LLC with the IRS.
Knowing how to build business credit for LLC is the same as establishing business credit for a sole proprietorship, but without the threat posed by bad personal credit. Following the same steps will get your business in a strong position to apply for business credit lines in the future.
Corporation
Corporations are also legally separate from business owners, but they offer even more protection from liability. You can’t be personally responsible for your business debts, and your personal assets are safe.
They are more difficult to set up and taxed at a higher level. If you’ve got a home business or a small-scale enterprise, this option isn’t for you.
Like an LLC, corporations can build business credit with loans and credit cards dedicated to the company.
There are a few more business structures that you might want to consider, like partnerships or non-profit corporations, but for building business credit they’re like the above.
How Do You Build Business Credit?
We’ve taken you through the steps on how to get business credit, what it is, and what it means for your business structure. We’ve shown you how to build business credit as a sole proprietorship, and how to do it with an LLC.
There’s a lot to remember, but here are the key points:
- Before building business credit, make sure your personal credit history is clean.
- Treat your business credit like your personal credit. Remember, the same things that help (or hurt your personal credit file will do the same for your business.
- Paying on time, in full, is the best way to get a solid credit history.
- Taking out loans and credit cards can help build your business credit, but only take the credit you can afford to repay.
Knowing how to obtain business credit is just the beginning. Now you’ve got to take that knowledge and beat the competition! Good luck!
AUTHOR Tom Quinn
Tom has worked in and around finances for most of his working life, from financial customer service to fraud prevention. He now writes in the personal finance arena, working to demystify money for the world.
