- Business credit is a snapshot of a company’s financial reputation and often affects its ability to secure financing or negotiate loan terms.
- Separating business and personal finances helps business owners establish business credit.
- A strong business credit score could lead to better financing options, lower interest rates, and more favorable supplier terms.
- Getting a Data Universal Numbering System (DUNS) number, opening business credit accounts, working with vendors that report payments, and making timely debt payments may help businesses build credit.
- Regular credit monitoring and proactive financial management could help businesses maintain a strong credit profile and avoid common pitfalls.
Just as a personal credit score impacts an individual’s ability to get a loan, business credit influences a company’s access to loans, vendor relationships, and overall financial credibility. Without a strong business credit profile, a business owner may have to rely on their personal credit score to secure financing or vendor relationships. This could have negative effects on their personal finances and makes it more difficult to separate business and personal financials.
Knowing what business credit is and how to build business credit is an essential skill for business owners looking to grow their business. This guide explores what to know about business credit, how to establish business credit, and how to build a strong business credit profile over time.
Understanding Business Credit
Business credit represents a company’s financial well-being in relation to borrowing money or paying vendors. A business credit score shows a company’s ability to borrow money, access financing, and secure favorable payment terms with vendors and suppliers.
Similar to personal credit, business credit reports look at financial history, debt repayment habits, and overall creditworthiness. Lenders, suppliers, and potential partners evaluate this credit profile when determining the level of financial risk associated with a business. Some businesses might use their business credit score as a key performance indicator (KPI) to track their long-term financial health.
Importance of Business Credit for Small Businesses
A strong business credit profile can open doors to financing opportunities, vendor partnerships, and long-term growth. Many lenders and suppliers rely on business credit scores when setting terms, interest rates, and credit limits. Without an established credit history, a business may face challenges securing necessary funding, leading to higher costs or limited financial flexibility.
Differences Between Business and Personal Credit
Many business owners know they have their own personal credit score. A personal score or credit profile may help individuals get financing, such as a car loan or mortgage. Higher personal credit scores generally lead to lower interest rates and better financing terms. Business credit scores offer similar benefits for business owners.
While personal and business credit share similarities, there are a few key differences:
- Identification: Business credit is linked to an entity’s employer identification number (EIN) or DUNS number, whereas personal credit is tied to an individual’s Social Security number.
- Public vs. private: Business credit reports are typically public, allowing lenders and suppliers to evaluate a company’s financial standing, while personal credit reports are private.
- Financial separation: Maintaining separate credit profiles for business and personal finances helps protect personal assets.
Benefits of Building Strong Business Credit
Having a strong business credit profile could help business owners take their business to new levels by opening doors for growth. Additionally, having strong business credit may be a sign that the company is using its financial resources responsibly.
Three reasons a business owner may want to keep a strong business credit profile include:
- Better access to loans and financing
- Higher chance of securing better rates or loan terms
- Improving the company’s reputation and credibility
Improved Access to Loans and Financing
Lenders often assess business credit when determining loan eligibility and financing terms. A well-established credit profile may improve the likelihood of securing funding, particularly when seeking business expansion or working capital.
Companies with poor or nonexistent credit histories may encounter stricter lending requirements or be required to provide personal guarantees.
Better Terms and Interest Rates
A strong credit profile can lead to more favorable borrowing conditions for businesses. Lenders and suppliers typically offer:
- Lower interest rates
- Higher credit limits
- More flexible payment terms
Over time, these advantages may reduce the cost of borrowing and improve cash flow management.
Enhancing Business Credibility and Reputation
A positive credit history signals financial stability and reliability to lenders, suppliers, and potential partners. This creditability can manifest in several ways, including:
- Vendors extending longer payment terms or higher credit limits
- Easier access to new business relationships
- Strengthened industry reputation
A positive financial reputation generally makes a business stronger both within its industry and with potential capital partners.
How To Build Business Credit
Much like a personal credit score, building business credit may take time. However, the key to successfully establishing and maintaining strong business credit is to be consistent. Successfully managing business finances can lead to a strong credit profile and long-term benefits for the business owner.
Setting Up a Legal Business Entity
Establishing a legal entity, such as an LLC or corporation, helps to separate business and personal finances. This distinction develops a standalone business credit profile and helps protect personal assets from business loans or financing.
Sole proprietors may find it more challenging to build business credit since financial activities are typically tied to personal credit histories. To establish business credit, a sole proprietor may want to consider switching their business entity. It’s recommended that they contact their tax professional and attorney to determine if a different business entity makes sense for their business.
Obtaining a DUNS Number
A DUNS number, issued by Dun & Bradstreet®, serves as a unique identifier for businesses. Many lenders and suppliers use this number to assess creditworthiness. Applying for a DUNS number[1] is a foundational step in building business credit and gaining visibility within credit reporting systems.
Opening Business Bank Accounts and Credit Cards
Maintaining a dedicated business bank account and securing a business credit card helps establish a financial history separate from personal credit. Regular transactions, responsible credit use, and timely payments contribute to a company’s credit profile development. Business credit cards can also serve as an initial source of revolving credit if a business needs ongoing financing for expenses.
Establishing Trade Lines with Vendors
Trade credit arrangements with suppliers allow businesses to purchase goods or services on credit, creating a trackable payment history. To strengthen a business’s credit profile:
- Work with vendors that report payment history to business credit bureaus
- Maintain consistent and timely payments
- Diversify trade lines across multiple suppliers
Ensuring Timely Debt Repayment
Consistently paying bills, loans, and credit obligations on time is one of the more critical factors in building and maintaining business credit. Late payments can negatively affect credit scores, reduce access to financing, and increase borrowing costs. Business owners could help improve their on-time payment history by:
- Setting up automated payments
- Using calendar reminders for due dates
- Monitoring accounts regularly to avoid missed payments
As with personal credit, making on-time payments is one of the easiest ways to establish business credit.
Overcoming Common Challenges
Building business credit isn’t always easy, especially for new businesses or those with limited financial history. Recognizing common challenges when building business credit could help businesses proactively manage their financials when establishing credit.
Navigating Initial Credit Limitations
New businesses may encounter challenges in securing credit due to a lack of financial history. Initially, access to financing may be limited to smaller credit lines or vendor-specific accounts. Businesses may be able to improve their credit standing over time by using their available credit responsibly and paying their bills on time.
After establishing a good relationship with a vendor or creditor, a business might be able to gradually request credit limit increases over time.
Avoiding Misconceptions About Business Credit
Many small business owners assume that business credit automatically builds over time, but proactive steps are required to establish and maintain a strong credit profile. Not all vendors report payment activity, for example. Some lenders even still consider a business owner’s personal credit when evaluating applications.
To avoid these pitfalls, businesses may want to work with vendors who will report their payments. Likewise, it could be beneficial to research lenders who will offer financing or loans to businesses with little to no business credit without requiring a personal guarantee, which could affect the business owner’s personal finances.
Frequently Asked Questions
Business owners often have questions regarding their business credit profile. Knowing the answers to common questions could set a business owner up for success when building business credit.
How Quickly Can You Build Business Credit?
The time required to establish a strong business credit score varies based on financial activity and reporting frequency. Businesses that consistently use credit, make timely payments, and maintain good financial practices may see improvements within a few months to a year for initial progress and several years for a fully developed credit profile.
Is It Easier To Get Business Credit With an LLC?
Operating as an LLC can facilitate business credit development by establishing a distinct legal entity. However, simply forming an LLC does not automatically generate a business credit score. Credit-building efforts still require active participation, including:
- Obtaining an EIN
- Opening dedicated financial accounts such as a business bank account
- Establishing credit lines with reporting vendors
Resources and Tools for Managing Business Credit
How does a business owner track and manage their business credit? This list of resources and tools may make it easier for business owners to establish, build, and maintain a strong business credit profile.
Credit Reporting Agencies
Major business credit bureaus track and report credit activity. Monitoring these reports regularly helps identify discrepancies and ensure accuracy. The most notable business credit agencies include:
- Dun & Bradstreet®
- Experian Business™
- Equifax Business™
Online Tools for Credit Monitoring
Several platforms offer business credit monitoring services, providing real-time updates on credit score changes, reporting errors, and potential risks.
These tools help businesses stay informed about their credit standing, find inaccuracies early, and identify opportunities to improve credit scores. Business owners should consider working with their business banker or other financial professional to find the business credit monitoring tools that work best for their business.
Expert Insights and Support Services
Financial advisors, accountants, and business bank managers can provide guidance on strategies for improving business credit. Many business banks offer educational resources and workshops on credit management. A business banker or financial professional might also offer a personalized credit improvement plan and assistance with dispute resolution for credit report errors.
Building and maintaining business credit requires strategic planning and disciplined financial management. While challenges may arise, a proactive approach may lead to improved financing opportunities, better vendor relationships, and long-term business stability.
