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Small Business Tips

How to Build Credit for Your Small Business

Manasa Reddigari
female business owner transcribing credit card number over the phone

Can’t take out a loan or get an outside investment because your business lacks a credit history? It may be time to start building your business credit.

Read on to learn how to build business credit and why it’s essential.

What is business credit?

Credit is a record of the ability and responsibility of a borrower to repay debts. As a business owner, you can establish two types of credit: personal and business.

In the case of personal credit, you as an individual are the borrower. When examining business credit, the borrower is the business. In the same way, your personal credit score reflects your personal credit history. And a business credit score reflects a business’s credit history.

But there’s an essential difference between these scores. Personal FICO scores range from 300 to 850. On the other hand, business credit scores range from 1 to 100. A score of 75 or higher is excellent.

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Why do you need to build business credit?

For one, you have to learn how to build business credit because it’s not earned by default. You don’t start adulthood with a positive personal credit history. You have to develop it over time.  

In the same way, you don’t gain a positive business credit history through the act of starting a business.

The practical benefits of building business credit include:

  • It can affect your business’s ability to get a loan or investment. Lenders approve loans and set loan terms or interest rates based on your business credit. Likewise, an investor may look at your credit to figure out whether you are worth the investment risk.
  • It boosts your negotiation power with suppliers. You may be able to get more favorable payment terms with suppliers if you have good business credit.
  • It may lower the cost of business insurance. A good business credit history may qualify you for lower business insurance premiums.
  • It maintains separation of personal and business spheres. Your business credit gets linked with your business tax ID instead of your SSN. You may be able to avoid personally guaranteeing a loan if you have a high business credit score.

What are some ways to build business credit?

Here are some approaches you can take for how to build business credit:

  • Establish your business as a separate legal entity from you. The first step to establishing a credit profile for your business is to get it on the radar of credit bureaus. The best way to do this is to make your business entity separate from you. Aim to incorporate or form an LLC. At the same time, get an employee identification number (EIN).
  • Get business checking and savings accounts. Make sure that you create these accounts in the legal name of your business. Forming banking relationships shows lenders that your firm has a handle on money.
  • Apply for a business credit card. Establish a track record of on-time repayments of business credit card debt. The emphasis here is on “business” debt. Avoid using your business credit card for personal expenses or vice versa. But let’s say you don’t have much of a business credit history. Your lender may refer to your personal credit before extending your business credit.
  • Work with vendors that report to the credit bureaus. Your good credit habits need to get reported to credit bureaus for you to build business credit. So ask would-be vendors if they report payments to the credit bureaus. These so-called trade lines between businesses and vendor can improve your credit. This is especially true if you establish many trade lines with a record of on-time payments.
  • Keep an eye on your credit rating. You can inquire with the individual credit bureaus for your score. The three business credit bureaus are Equifax Business, Dun & Bradstreet and Experian Business. Be sure to report any suspect information to the bureau. But don’t check your credit too often. The cost of business credit score checks can add up. Plus, it can take time to build your credit. The average business needs 12 to 18 months to boost its business credit score, says Cardhub. So exercise patience.

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