How To Build Business Credit

Young Couple Reviews Their Credit Score Looking At Laptop

If you’ve ever had loans, credit cards, or a mortgage, you’ve no doubt had to go through the process of getting your credit score checked. Your credit score is a financial representation of your credit history. We explore how to build business credit with these proven tactics.

Why is it important to establish business credit?

The better your business credit score, the more likely you are to be accepted for financing and the more favorable your financing rates will be. It’s exactly the same for your business.

Your business credit score provides banks and other lenders with an idea of how risky a proposition it is to offer your company financing. Better credit often means preferential interest rates, better loan opportunities, and fewer or lower processing fees. Yet building business credit can be tricky for startups or smaller businesses that have little to no financial history to speak of. That’s why understanding how to build business credit, or even how to establish business credit where you have none at all, can be a key factor in the success of your business.

Does your personal credit score matter for your business?

Your personal credit score will have the biggest impact on building business credit when you’re just starting out. If you don’t have business credit built up already, lenders will rely on your personal credit score to assess your creditworthiness.

Many business credit cards also require a personal guarantee, especially if you don’t have a lot of business credit yet. This means you promise to be personally liable for any debt the business accrues in the event the business is unable to pay.

It’s also important to note that some business credit cards involve a hard pull upon application, in which the creditor requests to look at your credit file. This can negatively impact both your personal and business credit scores.

The Capital on Tap Business Credit Card, issued by WebBank, only requires a soft pull, so applying won’t have any impact on your credit score.

Steps to build business credit fast

1. Register your business and get an EIN

Your first step to build business credit is to register your business and secure your Employer Identification Number (EIN), also known as a Federal Tax Identification Number.

When you register your business, you will have to determine your business entity type. You will have a few different options to choose from, including:

  • Sole proprietorships - don’t separate you personally from your business. You are automatically considered a sole proprietorship if you participate in business activities but don’t register your business as something else.
  • Limited Liability Companies (or LLCs) - separate your personal assets from your business assets, so you don’t risk assets such as your home, car, or personal savings in the event that your business goes into bankruptcy.
  • Corporations, or C corps - considered a legal entity independent of its owners. Corporations offer the greatest amount of protection against the loss of personal assets, but are the most expensive to form.
  • Partnerships - ideal for two people who own a business together and want to keep the structure as simplistic as possible. The two types of partnerships are limited partnerships (LP) and limited liability partnerships (LLP). The former has only one partner with unlimited liability, whereas the latter designates limited liability to every owner.

Once you’ve registered your business, you’ll need to acquire your EIN by filling out an application on the IRS’s website.

2. Avoid using personal lines of credit

When you first start out as a business owner or manager, you may be tempted to fund your venture with your own personal line of credit. This may be via personal credit cards, or taking out a loan in your own name. We don’t recommend this because mixing personal and business credit muddies the waters when it comes to building good credit for your business.

If you’re in a financial situation that makes those accounts hard to pay off, this could adversely affect your business credit score. Commingling personal and business accounts also makes accounting and taxes much more difficult. Business finance is made much simpler if you keep everything logged clearly under the business or trading name.

3. Open credit accounts with partners and suppliers

A simple way to establish a credit score is to ask any supplier or partner, like logistics providers, if they can grant you a credit account. You’ll have your very own line of credit that allows you to buy without upfront payment.

Many suppliers will provide an amount of credit far higher than the amount you need to use every month. Great news! This yields a positive credit utilization ratio – when the amount of credit you use is much lower than the amount of credit you’ve been granted. This counts positively for credit reporting companies when they calculate your score and is extremely helpful in building long-term business credit.

4. File your taxes correctly

Filing your business taxes correctly is obviously a no-brainer. It’s a requirement for keeping your business open and operating (and staying out of prison). But it will also preserve your business credit score.

If you don’t pay your taxes, the IRS will file a public record document called “Notice of Federal Tax Lien.” This lets creditors know that you are in legal trouble for unpaid or delinquent taxes. If there’s a tax lien associated with your business, your business credit score is almost guaranteed to drop.

It’s best to avoid them at all costs!

5. Make payments on time or early

Late payments are a massive negative strike on your credit score, so it’s important that you always pay your suppliers on time. Conversely, maintaining an open credit line, paying off your balance, and reusing the credit facility again boosts your business credit rating and increases your chances of gaining financing in the future. The same follows for your business’s utility bills.

Pay your power and water without going into arrears. Check when your premises’ rent is due and don’t miss the deadline for payment. If you can’t set up regular payments, make sure you take into account any time taken for banking transactions. Many are instantaneous, but some banks still recommend sending payments 1-3 working days prior to the due date.

6. Keep your public records clean

Public records are just that - public - and faithfully accessed by lenders any time you apply for a business credit card. Do all you can to avoid any blunders on your public records. Thankfully this is pretty easy to do. Pay your taxes correctly and on time, keep your business information up to date with any changes in contact information or critical personnel, and of course, stay out of any legal gray areas. 

7. Dispute any errors in your credit file

Part of learning how to establish business credit is gaining access to your business’s credit report. Companies like Equifax and Experian provide business credit reporting so that you can check every transaction is correct. Most of the time, your score should reflect your financial history accurately.

There may be occasions, however, when the reporting shows an error. This could be a flagged late payment that your business actually made on time. It could even be a line of credit that you never took out – perhaps you went partway through the application and changed your mind. Check your report or have your chief financial officer look it over to ensure it’s accurate.

8. Get a business credit card

One of the simplest and most practical ways to build your business credit score is with a business credit card.

A business credit card works well to build business credit because it allows you to spread payments over a period of time. Alternatively, business credit card users can make small purchases and pay them off immediately. This helps build your credit score from the ground up. Business credit cards can be used for everything from utilities to business lunches to supplies, and so on.

Running a business credit card helps you control business spending and stay on top of your finances – while building a healthy credit rating that makes your financing even more effective in the future.

The Capital on Tap Business Credit Card offers credit limits up to $50,000 and unlimited free 1.5% cash back on all purchases, with the opportunity to boost your cash back to 2% by switching to weekly AutoPay. Plus, get free cards for all your employees with no annual fees.

9. Limit credit applications

Since many business credit cards require hard credit pulls, applying to too many can negatively impact both your business and personal credit scores. Additionally, if you end up with too many business credit cards, it complicates your accounting. This can make it easy to miss payments or lose control of your spending.

It’s best to carefully assess how many business credit cards will be most impactful for your business financial goals, and limit your applications accordingly.

10. Borrow from lenders that report to credit bureaus

Make sure your bank, business credit card, and any other form of lenders you tap into report to one of the three main credit bureaus (Equifax, Experian, or TransUnion). While most do, there are no laws that require it, and if you borrow from a lender that opts not to, any positive strides you make building business credit will be hidden from record.

11. Monitor your business credit reports

Keep an eye on your business credit report and note any spikes or dips. If you see your business credit score improving, keep up the good work! Make a note of what you’re doing and keep at it.

If you notice your business credit score drop, try to pinpoint the cause and change your behavior accordingly to avoid further negative impacts.

You can access your business credit report from any of the main credit bureaus, but be aware there is a cost to doing so. It’s best to budget that into your business expenses as it’s an important part of building business credit.

How long does it take to build business credit?

While you will begin building business credit the moment you start transacting for your business, the length of time it takes to improve your business credit score depends on a number of factors.

Staying out of legal trouble and avoiding the aforementioned tactics that will hurt your business credit score lays the foundation for growth. Otherwise, timeframes will vary based on your business activities including how much you spend, how often you spend, and if you pay your credit card bills in full and on time.

What about companies that help build business credit?

While companies that promise to build your business credit as their exclusive business model may be a scam, establishing accounts with vendors that report to commercial credit agencies can give your business credit a boost.

Specifically, look for vendors that offer net-30 accounts, or accounts that allow you 30 days after purchase to pay your bill in full. If you pay within the 30-day term, these accounts will help you build business credit. Here are some supplies who offer net-30 payment terms and also report to commercial credit agencies:

Frequently Asked Questions

1. How can I build business credit with bad personal credit?

If you can’t lean on a strong personal credit history to build business credit, your best bet is to build business credit based on the merits of good business practices. If your business is bringing in revenue every month, and you’re paying off debts in a timely manner, you’ll be able to build business credit independent of your personal credit score.

But if you’re just struggling to get off the ground and don’t yet qualify for a business credit card, it may be worth applying for a working capital loan to cover the daily costs of running your business. If you are able to make timely payments on the loan, this will produce positive strides towards building business credit as well.

2. What is the easiest way to build business credit?

The easiest way to build business credit is to not limit yourself to one tactic. Follow all of the best practices outlined in this article so that if one method doesn’t work well for you, you have other options to fall back on.

3. How can I build business credit using an EIN?

While simply obtaining an EIN (Employer Identification Number) won’t help you build business credit on its own, it will allow you to apply for credit, such as a business credit card, which is critical to building business credit.

4. How can I establish business credit for the first time?

The most impactful way to build business credit for the first time is to open a business credit card, funnel all of your business purchases through it, and pay on time.

The Capital on Tap Business Credit Card offers credit limits up to $50,000 and unlimited free 1.5% cash back on all purchases, with the opportunity to boost your cash back to 2% by switching to weekly AutoPay.

Apply today to grow your business while earning lucrative rewards and building business credit.

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