Business Credit 101: What It Is and 5 Steps to Build It

This article was written by our partners at Tillful.

You’re likely very familiar with personal credit scores and reports. As soon as you turn 18 in the U.S., you start receiving credit card offers in the mail. Then, good credit is required if you want to finance a car, a house, or anything else. What’s not as widely understood is how business credit works. Many lean on personal credit to finance their businesses, which can be problematic for a few reasons. Here, we’ll cover what business credit is, why it’s beneficial, and how you can start building it as a business owner.

What is business credit?

Business credit refers to the credit reports, scores, and ratings created by the main business credit reporting agencies (CRAs) — Equifax, Experian, and Dun & Bradstreet. You may have heard of Experian and Equifax on the personal credit side, but they also have separate credit scoring services for businesses.

Business lenders and vendors look to business credit reports from the above CRAs to decide whether they should extend credit to businesses or not. The better your company’s track record, the more options you’ll have and the better terms you'll be able to get (e.g., higher loan amounts, lower interest rates, longer repayment terms, etc.).

How do business credit scores work?

Each business credit bureau has its own method of evaluating creditworthiness. For example, Experian has the Intelliscore Plus scoring system, where businesses receive a score on a scale from 300 to 850, with 850 being the best. It also assigns a risk class to businesses that ranges from one to five, with one indicating the lowest amount of risk.

On the other hand, D&B has over five different rating systems, including the PAYDEX score, which shows how well you’ve paid your bills over the last year. Overall, D&B considers factors such as:

• Time in business
• Evidence of liens
• Industry risk level/types of business
• Payment history/ on-time payments
• Time under current management
• Invoice size
• Number of tradelines
• Credit utilization
• Bankruptcies

Due to the different scoring systems, your business credit rating will vary from one agency to the next. Further, all business vendors and lenders don’t check with or report to all of the business credit bureaus. They may work with one or two, all three, or none of them. However, you don’t have to guess, as many will disclose which bureaus they report to and get reports from.

Why is it a good idea to build business credit?

Building business credit can be helpful for both expanding your access to credit and protecting your personal assets. Here’s a closer look at why.

Save personal credit for personal purposes

Building business credit helps to ensure you have personal credit available for personal reasons, such as buying a home and a car. Each person only has so much that they can borrow. Once your debt-to-income ratio gets too high, lenders will begin to deny any requests for more credit. When you use your personal available credit for business purposes, you’ll have less available for your personal needs.

Protect personal assets

Beyond that, if you establish your business as an entity separate from yourself, such as a corporation or Limited Liability Company (LLC), it will be liable for its own debts and give you a layer of protection. In this case, you won’t typically be liable for your business’s debts unless you sign a personal guarantee. For example, if your business files for bankruptcy, your personal assets like your savings accounts and home would not be at stake.

However, even if you’ve limited your personal liability, you can still be held personally liable for business debts if a creditor can prove that you didn’t properly separate your personal and business finances. Also known as “piercing the corporate veil,” funding your business with personally guaranteed funds and intermingling personal and business funds can put your personal assets at risk.

How can you start building business credit?

Wondering how to start building business credit? Here’s a step-by-step guide.

1. Get an Employer Identification Number (EIN)

Similar to how personal credit is tied to a social security number (SSN), business credit is tied to a federal employer identification number (EIN). Even if you don’t have employees, you’ll need this number in place before you can build business credit. You can apply for an EIN for free on the IRS website.

To qualify:

• Your business must have a principal residence in the United States or U.S. territories.
• You must have a valid SSN, ITIN, or EIN.
• You must be the person who owns or exercises ultimate effective control over the company.

2. Open a business credit account

Next, research business credit accounts that report to one or more of the three major business credit reporting agencies. With no past business credit history, you’ll usually need to start with a secured credit card or provide a personal guarantee. Personal guarantees can have drawbacks, as we covered above. However, many small business loans on the market require them, including U.S. Small Business Administration (SBA) loans.

To go the secured credit card route, you’ll pay a deposit and your business will be given a credit line equal to the amount you deposit. Then, you can use it like a normal credit card and build a positive business credit line. The Tillful secured business credit card is a good option to consider as it reports to Experian and other major business reporting agencies and doesn’t require business owners to provide personal guarantees.

3. Build a positive credit line

Once you have a business credit account established, use it in a way that builds a positive credit line as quickly as possible. But, how do you do that? First and foremost, make sure you make all of your repayments on time. Second, pay off your balance as soon as possible and try to keep it under 30%. Credit utilization will impact your score, so you want to keep your outstanding balance as low as possible.

As you build a positive credit history and your score begins to improve, you’ll be more likely to qualify when you apply with other business credit lenders and vendors.

4. Check your business credit reports

After you’ve had a business credit account established for two months, it’s time to check and see if it’s helping your scores yet. Each CRA works a little differently, so here’s how to check your reports:

• Experian: Download the free Tillful iOS app and sign up to see if your company has an Experian business credit profile. If it doesn’t, you can create one through the app.
• Equifax: Contact Equifax and request a copy of your report. If it’s not yet established, you’ll need to find a tradeline provider that reports to Equifax and open a tradeline with it.
• D&B: Your D&B report will be tied to your DUNS number. To find out if you have one yet, you can head over to D&B’s website and perform a search. If you don’t, you can request one by registering right there on the website.

5. Track and grow your business credit report and scores

While Equifax doesn’t provide small business owners with credit tracking services, both Experian and D&B do. You can track your Experian business credit score through the Tillful app at no cost. As for D&B, the company charges $39 per month to track all of your D&B credit scores, get explanations, and view industry benchmarks. However, you can view four of your credit scores for free for 14 days.

Along with keeping tabs on your business credit reports, you’ll want to continue improving your scores. To do so, open additional credit lines as you can, but be sure to manage them responsibly or they’ll work against you. Credit accounts can be obtained from financial institutions like banks and credit unions in the form of loans, leases, lines of credit, or credit cards. Additionally, you can get them from vendors and suppliers in the form of net payment accounts.

Build your business credit to support your business’s growth

A strong business credit profile tells vendors and financial institutions that your company fulfills its payment obligations. As a result, it’ll be easier to secure business financing, trade credit, business insurance, and more—with better rates and terms. Further, business credit can help to protect your personal finances and assets no matter what happens with your business.

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