10 Best Ways to Establish Business Credit as a Startup

How to Establish Business Credit

1. Establish a business entity.
2. Get a Federal Tax ID number for your business.
3. Open a business banking account.
4. Establish a business address and phone number.
5. Apply for a business DUNS number.
6. Open trade lines with your suppliers.
7. Get a business credit card or business line of credit.
8. Borrow from lenders who report to business credit bureaus.
9. Keep business information current with the bureaus.
10. Pay all of your business’s bills and loans back on time.

If you’ve ever been on the market for a consumer loan, such as a home loan, you’ve probably got a handle on your personal finances. You know where your personal credit score stands month-to-month and how personal credit impacts your ability to qualify for financial products.

But as a new business owner, you might not know anything about your startup’s business credit rating—why this is important, what your rating is, or how to establish and build a business credit history.

If you’ll ever need credit for your business in the future—with a small business loan or business credit card, for example—then your business can’t just get by with a strong personal credit score. That definitely will help, but you also need to establish a positive business credit history.

Fortunately, building business credit is more of a science than an art. There are some predictable, tried-and-true methods for getting the ball rolling. Find out how business credit works, how you can check your business credit file (for free), and the 10 best ways to establish business credit as a startup.

What is Business Credit?

Before we dive into how to establish business credit, let’s clear up what a business credit score actually is and why it matters.

Your personal credit rating is a number that captures your reliability as a borrower. In the same way, a business credit rating conveys whether your business is a trustworthy borrower.

The business credit reporting agencies—Dun & Bradstreet, Experian, and Equifax are the three main ones—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. Whereas personal credit scores range from 300 to 850, the most popular business credit score ranges from 1 to 100. Higher scores indicate that a business is trustworthy and likely to pay a bill or loan back on time.

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.

These entities will use your business credit score to make informed decisions about whether to qualify your business for certain products, and what terms and interest rates to extend to your business.

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

What’s In Your Business Credit File?

Before setting out to establish business credit, it’s helpful to know if you already have a business credit file and what’s in there. That way, you know where you stand currently and can figure out the best ways to improve your credit rating.

Many business owners are surprised to know that they already have a business credit report in their company’s name. Some business credit bureaus, including Experian and Equifax, pull public record information, such as collection data and court records, to create your business credit file and generate your score. So even if you haven’t actively created an account with a business credit agency, they might already have enough information about you to compile a business credit report.

There are several places online that let you check your business’s credit history for free. And if there is a report under your company’s name, you can get a free copy of your business credit report. At Fundera, we offer a free summary of your business and personal credit scores and send you alerts to changes in your credit reports. This helps you become an informed borrower and get access to the best financial products for your company.

10 Steps to Establishing Business Credit

For many small business owners, establishing business credit can seem like a mystery. But once you take control over your business’s credit history, you’ll start to understand it more and see how different actions affect your business credit rating.

One thing to keep in mind is that your business credit rating can vary across the bureaus. This is because the different bureaus have different rules for opening a business credit file. Dun & Bradstreet, for example, requires you to apply for an account before they open a business credit file in your  name. However, Experian and Equifax pull public record data, such as court documents, business filings, and collection data, to create a company’s file.

To further complicate matters, each bureau has different scoring systems. And not all vendors and creditors report to all of the bureaus, so your score will differ between each bureau.

While all these details might make it seem complicated to build business credit as a startup, there are some tried and true methods for establishing business credit.

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

1. Establish a Business Entity

As we mentioned before, your business credit history is separate from your personal credit history. To keep these two things separate, you need to set up a business entity and incorporate your startup.

Unincorporated business entities—a partnership and a sole proprietorship—are the easiest to work with in terms of starting up and managing paperwork. But with these structures, there’s no legal or financial separation between the owner and the business. When you choose to work with a vendor or apply for a loan, you’ll have to provide your personal social security number. As a result, your activity on your business accounts will be reflected on your personal credit report.

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

• 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. A Corporation is ideal for a business that’s planning to issue stock or go public in the future.
• S Corporation. Many businesses avoid a C corporation structure because 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 Company (LLC). An LLC is another type of incorporated business entity with liability protection and financial separation between you and your business. An LLC makes it easy to establish business credit, but it’s easier and less expensive to manage than a corporation.

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 lawyer or an accountant to determine how you should structure your startup.

2. Get a Federal Tax Identification Number

The IRS uses an employer identification number (EIN) to track businesses for income tax and payroll tax purposes. While your social security number serves as your identification number for personal taxes, your EIN serves the same purpose for your business.

Not all businesses are required to get an EIN. Sole proprietorships, partnerships, and  single-owner LLCs can just use the owner’s social security number for tax purposes (as long as they don’t have any employees). But if you have employees or are a registered business entity, then you have to get an EIN.

And even if you’re not required to, it’s a good idea to get an EIN anyway. One of the benefits is an EIN can help you establish business credit. And an EIN is free and easy to apply for on the IRS’s website.

When you eventually apply for a loan or a credit card 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 you can rely only on your personal credit to help you qualify and get a good rate. But if you have an EIN, then you can rely on your business credit history as well.

3. Open a Business Bank Account

As a business owner, keeping 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 expenses. Business credit bureaus will easily be able to see what money you’re taking out of and putting into your business, and will use that information to calculate your business credit score.

Once you have an EIN, head to a bank for a checking account. There are many local and national banks that offer 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 the three credit 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 that have been established for at least a couple years.

4. Establish a Dedicated Business Address and Phone Number

While this next tip 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, Yelp, YP.com, and Angie’s List require businesses to have an address and phone number to sign up. 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 with the phone company. This gets reported to credit agencies and helps in building business credit.

5. Apply for a Business DUNS Number

Dun & Bradstreet is probably the most well-known business credit reporting agency. Their Paydex business credit score is commonly used by suppliers and creditors. So if you want to establish business credit, it’s a good idea to open a credit file with this agency.

To do that, you’ll need to register 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 receive a unique nine digit code. The process is completely free, but takes up to 30 days.

Having a DUNS isn’t a requirement for businesses, unless you’re applying for a federal government contract, grant, or SBA loan, and it’s not a system that’s managed by the government. But suppliers and lenders all over the US and internationally use D&B business credit scores, so if you’re interested in establishing business credit for your startup, applying for a DUNS is a good idea.

6. Establish Trade Lines With Your Suppliers

If you’ve followed step one through five, then you have already laid a solid foundation upon which to build business credit. If you want to keep establishing business credit, there are some more 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.

While this credit isn’t coming from a traditional lender, it is similar to a loan. Paying your vendor or supplier on time and in full (maybe even early) will help you build your business credit—just like paying consumer credit cards on time helps you build your personal credit.

Lucas Horton, a gemologist and owner of Valeria Fine Jewelry, said trade lines helped his business credit:

“I opened four memo accounts with diamond sellers who reported to business credit bureaus. According to Experian, my business now has a B rating (up from a D) due to lack to information. I am not large enough to engage in things that would build my credit [even further] like taking out a loan, so that is probably as high as I will ever get. However, for my needs, it is high enough to get me the credit I require.

A memo account is when they send you diamonds and you have a certain amount of time to pay for it rather than paying for it upfront. Most of the larger companies I have accounts with at least report to Dun and Bradstreet or Experian.”

The key is to choose suppliers, like Horton did, who will report your payments to the business credit bureau. Not all do, and if your supplier doesn’t report to the business credit agencies, then your on-time (or early) payments won’t help you build your credit. Popular suppliers like Uline, Quill, and Grainger report to business credit bureaus. As long as you pay on time and in full, you’ll boost your business credit score.

7. Get a Business Credit Card or Line of 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, but using it will also help with establishing and building 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  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. This will this help solidify the separation between your personal and business finances, further establishing 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.

Nate Masterson, CEO of beauty company Maple Holistics, said he relied on business credit cards to improve his company’s business credit standing:

We decided to use business credit cards because … they play an essential role in building your company credit profile. This is particularly useful for small businesses who rely on loans and grants. Furthermore, because there are several major card issuers which report your business activity to your personal credit report, this can be a great way to boost your personal credit, if you are responsible.

Pay your bills early, or at the very least on time. This is the number one, most important rule that will get your business a perfect credit score with business credit bureau. We made sure to only use our business card on purchases we were confident we could pay off in full by the end of each month.

A business line of credit works in much the same way as a credit card, minus the physical card. Rather, the funds live in your business bank account, and you can withdraw money on as needed basis. You then pay back what you borrow to reset your balance.

The act of borrowing and repaying money on a business credit card or line of credit will help establish business credit—given that you’re paying on time (or early, if possible) and in full.

Secured Business Credit Cards Are a Stepping Stone to Building Credit

Pro tip: If you’re having a hard time qualifying for a regular 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.

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 deducts 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 become more eligible for better business credit products.

Argan oil has been around since the beggining of time, and we’re only just unlocking it’s full potential ? ? What do you use your argan oil for? 💁😙 #wherehaveyoubeenallmylife pic.twitter.com/FblYttAiVC

— Maple Holistics (@MapleHolistics) August 13, 2018

8. Borrow From Lenders That Report to the Business Credit Bureaus

If you’re repaying your credit cards and loans 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.

Some lenders don’t report to the business credit bureaus. 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 online 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 collects different information and has different scoring models. Plus, different suppliers and different lenders report different kinds of data.

Because a lender or supplier could pull your business credit report from any of the 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 improve.

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

And just like your personal credit score can get dinged by too much debt, so can your business credit score. If you’re feeling cash flow crunches or are having trouble paying your bills as a result of too much debt, consider options like refinancing or debt consolidation to make payments more manageable.

Establishing Business Credit Takes Time, But is Worth the Effort

In the end, there are several factors that impact your business credit. The length of your business credit history, your mix of credit accounts, and your credit utilization all matter for building your score—but your payment history is the most important factor.

By paying lenders and suppliers on time, or early, whenever possible, you can establish business credit for a startup and build your business credit score over time.

Once you’ve established business credit, keeping building business credit by being the most responsible borrower you can be over your business’s lifetime! You’ll thank yourself later when you qualify for the best financial products, at the lowest rates and the most favorable terms.

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