One crucial element that can significantly impact your business’s financial standing is credit. Just as individuals rely on personal credit scores, businesses need to establish and maintain strong credit to access financing, secure favorable terms, and build trust with partners and suppliers. In this article, we’ll explore four methods to build business credit.
Incorporate your business
The first step to building business credit is to establish your business as a separate legal entity, such as an LLC or corporation. This separation between your personal and business finances not only offers liability protection but also lays the groundwork for establishing a distinct credit profile for your business. When you incorporate, your business receives a unique legal identity. This separation is essential because it ensures your personal credit history doesn’t become entangled with your business’s financial affairs. As a result, creditors, suppliers, and lenders can assess your business’s creditworthiness independently.
This process will vary depending on your business structure and location. “Some states do not require sole proprietors to register if you operate under your own name,” says small business writer Kelsey Sheehy, writing for NerdWallet. “If you start an LLC, you’ll most likely need to register your business.”
Apply for business credit
Once you receive an Employer Identification Number from the IRS, contact Dun & Bradstreet to register your business and request a Data Universal Numbering System (D-U-N-S®) Number. This unique, nine-digit identifier acts not unlike a Social Security number for your business; it’s issued to and used by companies all around the world. Linked to your Dun & Bradstreet business credit profile, vendors, creditors, and suppliers can utilize your D-U-N-S Number to check your business credit score and assess your company’s overall financial health. “Not every D-U-N-S Number inquiry has to do with a company’s credit,” says Dun & Bradstreet. They can also be used to “identify immediate partners, their vendors, and even sub-contractors as part of … risk management assessments.”
Having a D-U-N-S Number is not a requirement for doing business, but it can help you build credit and legitimize your company to potential partners. According to Dun & Bradstreet, 90% of Fortune 500 companies use a live business identity such as the one they offer.
Open a business credit card
A business credit card enables you to separate personal and business expenses while establishing a credit history for your company. To maximize its impact on your credit profile, you should choose a card that reports to major credit bureaus, use it for business-related expenses only, and make timely payments consistently. Just as with a personal credit card, payment history is a crucial factor in determining your business creditworthiness. However, paying early is even better. “Dun & Bradstreet assigns better Paydex scores — which measure a business’s payment history — to companies that pay early,” Sheehy says.
Monitor and review your credit reports
The three major credit bureaus — Experian, Equifax, and Dun & Bradstreet — compile information about your business’s credit activities. Regularly monitoring and reviewing this information is essential for maintaining a healthy credit profile. “Check your business credit score with all three,” Sheehy writes. “Then, ensure all trade lines are accounted for and report any errors — whether they’re to your address or incorrect negative marks.”
Request copies of your business credit reports from these bureaus and review them carefully. Look for any discrepancies or inaccuracies, such as outdated information or accounts that don’t belong to your business. If you discover errors, promptly dispute them.
Monitoring your business credit reports also allows you to track your credit score’s progress over time. As your business establishes a positive credit history, you can leverage it to secure better financing options and build trust with creditors and partners.