10 Best Ways to Establish Business Credit as a Startup

As a savvy consumer, you’ve got a handle on your personal finances—meaning you know where your personal credit score stands month-to-month.

But as a new business owner, you might not know anything about your startup’s business credit—why it’s important, what yours looks like, and how to establish and build it.

If you’ll ever need credit for your business in the future—with a small business loan, or business credit card—then your business can’t just get by on the coattails of your strong personal credit score. At some point, you’ll want to establish a strong, sparkling business credit history.

How does one do that? Well, there are tried-and-true methods for getting the ball rolling.

Here are the 10 best ways to establish business credit as a startup.

What is Business Credit?

Before we dive deep into how to establish business credit, we need to do some background work on what a business credit score is.

In many ways, your business credit report reads just like your personal credit report.

If your personal credit rating keeps track of your trustworthiness with your personal credit accounts, your business credit rating does the same—just for your business’s credit accounts.

The business credit reporting agencies (Dun & Bradstreet being the most well-known business credit reporting bureau) collect information from the vendors and creditors you do business with. That borrowing information gets processed through a credit reporting algorithm to establish your business credit.

The number that a business credit reporting agency spits out, however, is on a different scale than your personal credit: business credit scores range from 0 to 100.

Why Should You Care to Establish Business Credit?

Just as the strength of your personal credit score determines what types of credit products you qualify for and the rates and terms you get, your business credit score is a key factor in a lender, vendor, or supplier’s decision to work with you.

A business lender or supplier wants to see that your business has a good track record of paying your accounts on time, and in full.

With your business credit score, these entities can make more informed decisions about what terms and rates to extend to your business in regards to their payment.

A strong business credit score will open up the doors to affordable, long-term credit for your business.

10 Steps to Establishing Business Credit

For many small business owners, the hardest part of establishing business credit is simply getting your payment histories reported in the first place.

Many vendors and suppliers don’t report your payment histories if everything is going well. Only some will report your behavior if you’ve made delinquent payments.

And on top of that, even if a vendor does take the time to file a report, depending on how your business is set up, that information could be reflected on your personal credit report (or applied to the wrong business entirely).

While it may seem complicated to establish business credit as a startup, we’re here to help you lay down a base foundation to a stellar business credit score.

Here are 10 steps to make sure you’re establishing business credit as a startup.

1. Establish Your Business Entity

As we mentioned, you want your business’s payment history to be reflected on your business accounts, not your personal ones.

And for this to happen, you need to set up your business entity and incorporate your startup.

You’ll want to choose an entity structure that ensures that your business is seen as a separate business entity.

Your next logical question is, which business entities will separate you from your business and help establish business credit?

While the two most basic business structures—a partnership and a sole proprietorship—are the easiest to work with in terms of starting up and managing paperwork, these entities are unincorporated.

If you’re set up as a sole proprietorship or partnership, you’ll have a harder time establishing business credit as a separate entity. This is because with either of these structures, there’s pretty much no legal or financial difference between you and your business. So your habits with your business accounts will be reflected on your personal accounts, and vice-versa.

If you’re concerned with establishing business credit, then the structures you’ll want to choose are the following:

• C Corporation. A C corporation gives you and your business the most legal and financial separation. This makes it much easier to quickly establish and build business credit. While a C corporation is regarded as a more complicated structure to set up, it’ll be worth the extra effort if establishing a strong business credit score is of priority to your business.
• S Corporation. Many businesses avoid a C corporation structure solely due to the fact that a C corporation is subject to a double tax. S corporations are a “pass-through” entity that avoids this double taxation, and the business’s profits are only taxed at the individual level. Beyond this, an S corporation has the same business credit building benefits of C corporations—establishing clear separation between you and your business.
• Limited Liability Corporation (LLC). An LLC is technically an incorporated business entity with liability protection (creating financial separation between you and your business, helping establish business credit), but it’s a much easier and less expensive way to structure your business.

While it’s important to keep your ability to build business credit in mind while making your decision on how to structure your business, it’s not the only thing you should be thinking about.

If you’re unsure what exactly you should be focusing on, consult a business advisor or an accountant to determine how you should incorporate your startup.

2. Get a Federal Tax Identification Number

The IRS uses an employer identification number (EIN) to monitor businesses—mostly for employer payroll tax purposes.

Whereas your social security number serves as your identification number for personal taxes, your EIN serves the same purpose for your business. It helps the IRS keep track of your business—including its income and tax obligations.

You’re really not obliged to get an EIN. Sole proprietorships, partnerships, and even single-owner LLCs can just use the owner’s social security number for tax purposes (as long as they don’t retain any employees).

However, it’s probably a good idea to get an EIN anyway.

When you eventually apply for credit for your business, you’ll usually be asked to either provide your social security number or EIN on the application. If you only have your social security number to offer, then your credit history won’t be reported to your business, and will most likely be reflected on your personal credit history.

So if you’re looking to establish business credit, it’s best to secure an EIN from early on.

3. Open a Business Bank Account

As a business owner, it’s crucial that you keep your business and personal finances separate. This is an important practice for many reasons, but is especially crucial in regards to establishing business credit.

Opening a business bank account is the first step to drawing a line between business and personal.

Once your EIN is registered, head to a bank for a checking account. There are many local and national banks offering free business checking accounts to consider.

Having a business bank account is a crucial step to establishing business credit. It will not only provide a bank reference for reporting agencies, but will open doors for better credit accounts in the future—the best small business lenders look for borrowers with business bank accounts of at least 2 years in age.

4. Establish a Dedicated Business Address and Phone Number

While it might seem like a simple step, getting a dedicated business address and phone number will solidify your business’s separate existence.

Having this is a small, but important step towards establishing business credit because it will allow you to register with business directories.

Directories like the Better Business Bureau, YP.com, and local.com will need a business address and phone number to submit a business. And as it related to establishing business credit, you’ll want to be listed on these directories: business credit reporting agencies collect information from these directories, so it’s important to have correct and consistent contact information listed on all of the popular directories.

Also, when you set up a dedicated phone line for your business, you’re establishing your first, simple trade credit relationship. This will be reported to credit agencies (plus, a business credit bureau will probably look at your business phone listing as a verification step).

5. Apply for Your Business’s DUNS Number

Dun & Bradstreet is probably the most well-known and popular business credit reporting agency. And if you want to establish business credit, it’s a good idea to get known with this agency.

To do that, get registered for a DUNS—a Data Universal Number System. The DUNS system is a numerical identification process for business entities. When you apply for one, you’ll be given your own nine digit code.

Having a DUNS isn’t a requirement for businesses, and it’s not a system that’s managed by the government.

Besides that fact, a DUNS is like a social security number for a business. And if you’re interested in establishing business credit for your startup, applying for a DUNS is a good idea. You’ll also need a DUNS number if you ever try to go for a government contract or apply for an SBA loan in the future.

6. Establish Trade Lines With Your Suppliers

If you’ve followed step one through five, then you have all your ducks in a row for laying the foundation for good business credit.

If you want to keep establishing business credit, there are some best practices.

One is to maintain and establish good relationships with vendors and suppliers.

Just as with your personal credit rating, your business credit score will build as you bring on a variety of different suppliers, vendors, and lenders—given that you maintain a good relationship with them.

As you buy more supplies, inventory, or other materials from third-party suppliers, those purchases can become relationships—and help you establish business credit. Especially if those suppliers and vendors extend trade credit, meaning they allow you to pay several days or weeks after you receive the items you ordered.

When this type of relationship is established, ask the supplier to report your payments to the business credit bureau.

As long as you pay on time and in full, you’ll boost your business credit score.

7. Take Out Business Credit

Many startups and small businesses use loans and credit lines to finance the operation and growth of their business.

Not only is this type of credit crucial for keeping a business running smoothly, using it will help establish and build your business credit.

If you’re truly a startup—with only a few months under your belt—then you might not qualify for the variety of business credit products that are available to small business owners.

Business loans like term loans, SBA loans, or longer-term lines of credit will typically require at least 2 years in business for eligible borrowers.

If you’re not quite there yet, consider applying for a business credit card to cover day-to-day purchases for your business.

Not only will this help solidify the separation between your personal and business finances, it’ll help establish business credit.

A business credit card gives you access to a revolving credit account—you borrow money when you swipe the card, and you pay the credit card issuer back before each statement. When you repay the amount you borrowed, your available credit limit gets replenished to the original amount.
The act of borrowing and repaying money on a business credit card will help establish business credit—given that you’re paying on time (or early, if possible) and in full.

Pro tip: If you’re having a hard time qualifying for business credit cards, try secured business credit cards. A secured business credit card is “secured” by a funds deposit that you make against your card. So, for instance, if you make a deposit of $500, you can use your secured business credit card up to the credit limit of $500. If you’re unable to repay your business credit card bill, the issuer can simply take from your deposit to recoup their losses. This makes the act of lending to you a lot less risky for the issuer, so they might be more likely to extend you credit in the form of a business credit card.

Once you’ve made progress towards establishing business credit—using business credit cards and maintaining strong relationships with suppliers and vendors—you’ll find that you’ll be more eligible for better business credit products.

When this becomes the case, an account that helps establish business credit is a line of credit.

Business lines of credit are, again, revolving credit accounts—you’re given access to a pool of funds that you can draw on whenever you want or need to. Once you pay the line of credit lender back, your credit line gets filled to its original amount.

The action of drawing and repaying on a line of credit—when used responsibly—will help build your business credit.

8. Work With Lenders That Report to the Business Credit Bureaus

If you’re repaying your credit accounts on time and in full, you can be proud of your stellar payment history.

However, you’ll want to be sure that you’re actually getting recognized for this good behavior.

We say this because some lenders don’t report to the business credit bureaus. And if this is the case for one or all of your accounts, you won’t be establishing your business credit score with good borrowing behavior.

Most banks and traditional financing institutions will routinely report borrowers’ repayment histories to business credit reporting bureaus.

Some alternative lenders, however, don’t file reports to these bureaus. If you’re looking to establish business credit, then it’s a good idea to work with lenders that report to the business credit bureaus. Check into a lender’s policy on this before you apply!

9. Keep Your Information Current With the Bureaus

Dun & Bradstreet is the most popular business credit reporting agency, but Equifax and Experian collect business credit history as well.

And unlike the personal credit reporting process—guided by the standardized FICO score—business credit reporting doesn’t have the same streamlined process. Each business credit bureau has a different way of collecting information, collects different information, and different lenders report different kinds of data.

Because a lender could pull your business credit report from any of these three popular bureaus, it’s important that you keep an eye on each of your reports—maintaining all three of them.

These bureaus allow you to update basic information about your business (like number of employees or years in business) and upload financial documents. The more complete your profile is at each of the business credit reporting bureaus, the better.

10. Borrow Responsibly

When it comes to establishing and building business credit, your mantra should be exactly the same as it is with building personal credit: borrow responsibly.

Your score isn’t going to skyrocket overnight.

But with steady, responsible borrowing habits—drawing from a mix of business credit accounts, and paying those accounts on time and in full—you’ll see your business credit score getting more and more established.

As with a personal credit rating, your business credit rating will suffer if you apply to too many credit accounts over a short period of time. Make sure to space out your business credit card or business loan applications.

In the end, the length of your business credit history, mix of credit, and your credit utilization matter for building your score—but your payment history is the most important factor of your business credit score.

Once you’ve established business credit, keeping building it by being the most responsible borrower you can be over your business’s lifetime!

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