If you’ve ever applied for a mortgage or car loan, you know how much your personal credit score impacts your interest rate, fees, and down payment.
But many small-business owners are less familiar with how business credit works. Many entrepreneurs don’t even realize they have a credit score, much less know what it is.
If you’re one of those small-business owners, it’s time to learn what you don’t know about your business credit – and how to improve it.
How Does Business Credit Work?
Just as your personal credit report measures the risk of lending money to you as an individual, your business credit history helps potential lenders determine the risk of extending credit to your business.
It’s based on similar factors, such as your business’s payment history and credit utilization ratio. And like your personal credit report, credit bureaus assign your business a credit score.
As convenient as the analogy is, however, there are differences between personal consumer credit reports and business credit reports.
How Business Credit Differs From Personal Credit
There are three primary credit bureaus for business reporting, just like personal credit reporting. Two of the three overlap with personal credit reporting: Experian and Equifax.
The third bureau for business credit reporting is Dun & Bradstreet (D&B), who leads the business credit industry. Instead of a 300 to 850 credit scoring range, D&B uses a simpler 1 to 100 scoring range.
And while your personal credit history is tied to your Social Security number, business credit is linked to your Employer Identification Number (EIN).
Business credit reporting tends to be simpler than personal credit reporting. The credit bureaus most commonly use the third-party FICO scoring model for personal credit scores. The FICO algorithm takes many variables into account. Fewer variables go into calculating business credit scores, which generally makes it easier to improve your score.
That said, businesses don’t have the same legal protections as consumers. If you find an error on your business credit report, you can report it to the credit bureaus. But they don’t have to respond by law like they do for personal credit disputes.
Why Your Business Credit Matters
And before you dismiss the possibility of taking on debt, bear in mind your business’s needs change, often unpredictably. Your business could face a crisis in six months and need an injection of capital to survive. Or you could discover a major opportunity you can only capitalize on with far more cash than you currently have on hand.
Similarly, your business credit impacts your ability to open a business credit card and your credit limit. As your business grows, a business credit card may become increasingly useful or even necessary.
But business credit runs deeper than simple borrowing. Your business insurance premiums vary based on your credit. With better credit, you can expect lower premiums and access to better policies.
Vendors and suppliers also use business credit to decide whether to work with you, particularly if they invoice you after delivering. With poor business credit, you may find yourself isolated and unable to work with the better vendors and suppliers in your industry.
In other words, your business credit matters more than you may think.
Keeping Your Personal & Business Credit Separate
As a small-business owner, poor or no business credit can put your personal assets at risk.
Imagine you need a loan, credit line, or business trade line. With marginal business credit, more creditors require you to guarantee the credit line personally. They may even decline you entirely and force you to approach personal lenders instead.
Either way, if you default on that debt, it’s not just your business on the line. The creditors can come after all your personal assets: your home, car, brokerage account and personal investments – you name it.
But with better business credit, you don’t need to put your personal credit on the line as often, if at all. You can rely on business credit and keep your personal assets separate and safe.
What’s In Your Business Credit File
Even if you’ve never opened a business credit line or loan, your business may still have a credit profile and report.
Some credit bureaus trawl public records to establish your business credit history. They look for bankruptcies, judgments, liens, and other court records as negative indicators. They know your business address and when your business was incorporated.
And of course, if your business does have credit accounts open, they track that information as well. Just as with personal credit, the bureaus put an emphasis on payment history and the ratio of credit available to you versus credit used.
If you’ve never seen one, Equifax has a sample business credit report to give business owners a better sense of what it includes.
10 Steps to Build Better Business Credit
Ready to start actively boosting your business’s credit history and score?
Follow these 10 steps – many of which you may have already completed – to get you there.
1. Register Your Business
If you haven’t done so already, file with your state’s department of assessment and taxation or labor and licensing to create a business entity.
You’d be surprised at how little you need to start a business. Beyond your name, address, the name of the business, and a few other minor details, you just need the articles of organization and the filing fee.
While it’s always a good idea to consult an attorney, this is one legal task most entrepreneurs can handle themselves through LegalZoom. Before deciding whether to lay down thousands of dollars on an attorney, spend 15 minutes on Google looking up the procedure to open a limited liability company or other legal entity in your state. Most states design this process to be exceptionally easy – the better to take your filing fees, my dear.
Even if you’re currently a solopreneur or considering making money from a hobby, it often makes sense to register a real business. If nothing else, you can take advantage of small-business tax deductions and keep your accounting cleaner.
2. Get an EIN
Similarly, the IRS intentionally makes it easy for new businesses to create an EIN so they can track your business for tax purposes.
But you also need it to both apply for credit accounts and build business credit. It’s how the IRS tracks your payment history and other credit.
Visit the IRS website to apply for an EIN. It usually takes just a few minutes, is all handled online, and is likely to be the most pain-free interaction you’ll ever have with the IRS.
3. Open a Business Checking Account
Just as you want to keep your business credit accounts separate from your personal credit, you also want to keep your business finances separate from your personal finances.
To begin with, it keeps your accounting cleaner and easier. But just as critically, it helps protect you against personal liability.
When you commingle funds between your personal and business accounts, you blur the lines between them from a legal standpoint. If you get sued, the plaintiff usually tries to “pierce the corporate veil” and come after you personally. And the judge generally allows it if you haven’t kept any separation between your business and personal finances. See this explanation from Paperbark Law for additional details.
Start separating your finances by opening a business checking account. If your personal bank doesn’t offer cheap or free business checking, try Chase’s business checking account as a convenient option.
Beyond the accounting and legal reasons to open a business checking account, it also helps you build business credit. It establishes a bank reference for your business and opens the door to better credit in the future. Typically, business lenders look at your banking history, and the longer your business bank account has been open, the better.
4. Establish a Business Address & Phone Number
It may seem trivial, but having a dedicated business address and phone number helps you register with business directories, such as the Yellow Pages, Better Business Bureau, Angie’s List, and Yelp.
The credit bureaus pull information about your business from these directories You can use your home address and mobile phone number, of course. But a dedicated business address and phone number help you better separate your personal and business lives.
And let’s be honest, it’s more professional.
It doesn’t have to cost you an arm and a leg, either. You can get a free virtual business phone number, redirected to any phone line you like, through services like Google Voice or eVoice. Or you can have a separate business phone line installed.
Likewise, you can get a virtual business address, where mail gets forwarded wherever you like. As an expat and entrepreneur myself, I use a private mail service that goes even further. They scan my envelopes for me to view online, and I direct them to either physically forward it, open and scan the mail for me to view online, or shred it. I use St. Brendan’s Isle, but they’re not the only service on the market.
Ideally, these phone and address services create your first credit accounts, reported to the credit bureaus to help you start establishing credit.
5. Apply for a D-U-N-S Number
Since Dun & Bradstreet is the largest business credit reporting agency, you want to play ball by their rules.
Opening a credit file directly with them is a significant first step to doing that. Visit their website to apply for a Data Universal Number System number and open a file with them.
It’s free, although it can take up to 30 days. And while it’s not mandatory – Dun & Bradstreet may well open a credit history file on you regardless – it helps to initiate your own file with them. If nothing else, it lets you set the record straight on your business’s details and opens a direct line of communication with them in the event of a dispute.
6. Open Trade Lines With Your Suppliers
Vendors and suppliers often allow businesses to pay after receiving their goods or services. This is a form of credit. And many report these payments to the credit bureaus. Just as on-time loan payments help establish good credit, so too do on-time trade line payments.
Beyond helping you boost your business credit score, it also builds better relationships with your vendors and suppliers, which often comprise your most important business relationships.
Choose your suppliers carefully, and then nurture the relationship with on-time or even early payments. Better invoicing terms can improve your business’s cash flow and help you avoid cash choke points.
7. Get a Business Credit Card or Line of Credit
Likewise, business credit cards and lines of credit simultaneously help you build your credit history and can alleviate cash-flow squeezes.
In some cases, you can earn valuable rewards from business credit cards as well – especially at the volume you may be using them. At my previous company, a large portion of our business came from online ads, particularly Google Ads. We routinely spent six digits on online ads in a single month.
That’s a lot of free travel on a travel rewards card. But business credit cards don’t work entirely the same as personal credit cards. Before choosing one, read up on tips for applying for business credit cards.
8. Choose Lenders Who Report Your Payments
Most banks and other business lenders report your monthly payments to the credit bureaus. This helps deepen and build your credit history.
Not all lenders report your payment history, however. Before signing on with a given business lender, double-check that they report to the credit bureaus.
Of course, reporting cuts both ways. If you default, that gets reported to the bureaus too.
9. Use Leverage With Caution
Paying your bills on time and not getting in over your head should go without saying. Yet borrowers fail to make timely payments all the time.
Borrow responsibly. Debt is a tool – and one millions of Americans misuse through bad financial habits such as maintaining high credit card balances. As useful as credit is, it’s also extremely dangerous and has buried many a business over the centuries.
If you’re interested in growing your business with debt, spend some time speaking with other entrepreneurs who leveraged debt to grow. Ask them not just about what went right, but specifically ask about what went wrong. What would they do differently if they were to do it all over again?
Again, debt is a tool; learn how to wield it with skill before you actually need it.
10. Monitor Your Business Credit & Keep It Current
As you may have discovered with your personal credit, the bureaus sometimes mess up.
The fastest way to improve your credit score is to find mistakes on your credit report and correct them. It works for your business credit too, although the bureaus aren’t legally obligated to respond to your submissions.
That doesn’t mean they ignore disputes. But the responsibility lies with you to monitor your credit report and notify the bureaus of any errors.
Pull your business credit report at least once per year to check for errors. While you’re at it, notify the credit bureaus of any changes in your business ownership, address, phone number, or any other pertinent details.
An accurate credit history isn’t the bureaus’ responsibility. It’s yours.
Lastly, keep your balances as low as possible. Just as with your personal credit, higher usage of your available credit hurts your credit score.
If anything, good credit matters even more for your business than it does in your personal life. The ability to borrow money in a pinch or to work with the best vendors and suppliers could be the difference between your business surviving or failing.
Think of your business credit as an ongoing long-term project. Keep an eye on it and continuously improve it, and more opportunities will open up for you.
Ignore it, and you may find yourself isolated and alone in a cutthroat industry.
What’s worked for you in improving your business credit? How has your credit – good or bad – affected your business?