How to Build Business Credit: 10 Steps To Get Started in 2024

With 82% of businesses failing due to cash flow issues, securing funds becomes more crucial. Yet, the reality is that banks reject around 80% of small business loan applications, and one in five requests are declined due to business credit issues. This highlights the critical role of building good business credit.

However, for newcomers, building credit can be a paradox: You need credit to obtain credit, but where do you start if you have none?

In this guide, we'll explore how to build business credit step by step, with strategies that work for beginners and small business owners.

Business credit is an evaluation of your company's creditworthiness and risks assessed by credit bureaus. It reflects your business's capability to purchase, manage finances, and handle debt.

A business credit is constructed using data related to your financial history, such as business payment history, loans taken out by the business, amounts owed, length of credit history, and more. 

Equifax, Experian, and Dun & Bradstreet are the major business credit reporting agencies, each using slightly different scoring methods and scales. However, many of these agencies rank business credit scores from 1 to 100, where higher scores signify lower risk and greater creditworthiness.

Building a strong business credit profile can expand financing options, optimize cash flow, lower costs, and enhance your company's reputation. 

Here are the potential advantages of having good business credit:

• More financing options and borrowing capacity. With a proven track record of responsible credit use, business owners will find it easier to obtain loans and business lines of credit needed to fund expansions and new growth initiatives.
• Better terms with suppliers. Vendors may be more willing to offer perks like extended payment periods to companies they view as having good credits. An extended payment period means an improvement in cash flow, which can help with the overall operating process.
• Potential for lower insurance premiums over time. Insurers view strong credit as a sign of lower risk, so rates might decrease as the business establishes financial stability.

Enhanced credibility and reputation. Responsible borrowing conveys that the business is well-managed and trustworthy to lenders and customers.

Building business credit is a critical step for any business looking to secure future financing, manage cash flow effectively, and establish a trustworthy reputation in the marketplace. 

This section outlines ten fundamental steps that can set the foundation for a robust business credit profile.

The first step to building business credit is establishing your business as a separate legal entity. Common structures include limited liability companies (LLCs) and S-corporations.

Setting up your business's legal structure is crucial because it creates a clear separation between your personal and business finances, allowing your business to develop its credit profile independent of your personal credit history. 

This separation also ensures that your personal credit remains unaffected by any business debts or issues.

Once you've selected the appropriate legal structure, the next step is to register your business with the state or local jurisdiction where you'll operate. 

Ensure that you adhere to all guidelines for business registration in your area. Some jurisdictions may require permits, licenses, or zoning approvals based on your industry. 

This step sets the stage for obtaining an Employer Identification Number (EIN) and creating business-specific accounts, payments, and credit history.

Next, obtain a business identification number, which varies depending on your business location.

In the US, you'll need to acquire an Employer Identification Number (EIN) from the IRS. This unique 9-digit number is essential for filing tax returns separately from personal filings, opening business banking accounts, and establishing business credit. 

You can apply for an EIN online through the IRS website at no cost. Prepare to provide business information, such as your legal structure and the beneficial owner's details.
Other jurisdictions have similar identification numbers used for purposes similar to the EIN in the US. For example, Canada has the Business Number (BN), the United Kingdom uses the Unique Taxpayer Reference (UTR), and Hong Kong uses the Business Registration Number (BRN).

A Data Universal Numbering System (DUNS or D-U-N-S Number), developed by Dun & Bradstreet, is a unique nine-digit identification number that allows your business to be tracked and identified in the credit reporting system. As its name suggests, this number is a standard worldwide.

Many lenders use D&B reports to assess the creditworthiness of companies they offer to finance.

You can register for a D-U-N-S for free through the D&B website.

Newly established business owners, entrepreneurs, or sole proprietors may believe they can use personal bank accounts for their business transactions. However, co-mingling personal finances with business ones makes it difficult for lenders and creditors to distinguish between your business and personal credit risk.

Therefore, having a dedicated business account is essential. Not only does it help in establishing a separate credit profile for your business, but it also ensures accurate tax filings, facilitates better financial management, and offers protection against personal assets.

A trade line is a record of credit extended to a borrower, established upon approval for credit. It is reported to credit agencies and impacts credit scores.

The easiest way to set up trade lines is by establishing relationships with suppliers, vendors, utility companies, and other regular business partners or service providers who extend credit to your business. This means they provide you with goods and services on net 30 or net 60-day payment terms.

Once you make payments to them on time, the positive payment histories contribute meaningful payment performance data to the major credit bureaus over time.

Make sure to work with vendors that specifically report payment history to credit bureaus. The easiest way to know is to ask them. Alternatively, list vendors as trade references or request a trade reference report that details payment history. The business credit bureaus can then collect your trade data if listed, or you can hand them the report.

Using a business credit card responsibly can be one of the fastest methods to begin building credit.

For new businesses, credit card issuers often assess the owner’s personal credit. If your personal credit score is low, one strategy is obtaining a secured business credit card. A secured credit card is designed specifically for individuals and businesses at their outset with either no credit history or a poor credit record. 

These cards require a security deposit, which will determine your credit limit. They then report your usage to the three primary credit bureaus, helping you build credit over time so long as you use it responsibly. Additionally, some secured cards offer the option to upgrade once your credit has been successfully established to a certain degree.

Credit unions and smaller banks may be more open to working with small businesses and startups. If your business lacks established credit, these institutions may rely on your personal credit scores for approval.

A credit builder loan is a small loan designed to establish credit. In contrast to traditional loans, where you receive funds upfront and repay over time, with a credit builder loan, a small loan amount ranging from USD 300-1,000 with repayment terms of 6 to 24 months is deposited into a locked savings or CD account. 

To access the funds, you need to make repayments first. Some lenders release portions of the loan gradually with each payment, while others disburse the entire sum after all payments are made. 

Lenders of credit builder loans report your payments to major credit bureaus, helping you build a good payment history as long as you consistently make payments on time. Additionally, some may offer partial refunds of interest charged.

Credit builder loans are easier to qualify for than traditional loans due to the upfront deposit acting as collateral. However, these loans come with administrative fees and interest rates. Plus, they may affect your monthly cash flow since you can't access the funds until the loan is paid off. 

These loans are often offered by smaller financial institutions such as credit unions, community banks, and online lenders.

Essentially, establishing a strong credit history relies on on-time payments. While getting a business credit card or net 30 terms with suppliers can help you start building business credit, not adhering to payment schedules will counteract these efforts.

Focusing on early payments can also enhance your business credit profile. In fact, attaining a perfect Paydex® Score—a business credit score monitored by Dun & Bradstreet (D&B)—of 100 requires making early payments, according to the US Small Business Administration (SBA).

Here are some tips to ensure prompt or early payment, 

• Set up automatic payments through your bank account or credit cards
• Set up reminders 1-2 weeks prior to due dates

After you've put in the effort to establish your credit, it's important to monitor your credit to ensure everything progresses as planned.

You can monitor your business credit file by getting a copy of your credit report from Dun & Bradstreet, Experian, or Equifax. If you come across any issues or inaccuracies, it’s best to dispute them promptly. 

Business credit reporting agencies often provide a data dispute channel in the report. Alternatively, you can call their customer service or send an email. 

For Experian and Equifax, you can use the following online channels.

• File a dispute on your credit report at Experian
• File a dispute on your credit report at Equifax 

Additionally, it's crucial to keep your company profile information updated with the credit bureaus, including details like your business name, business structure, phone number, location, and product or service information.

Establishing business credit starts with your credit activities being reported to a credit bureau, which typically takes a minimum of 30 days but can often extend to 60 or 90 days. Once your payment history is recorded on your business credit report, you have officially begun the journey of building credit.

You can start to develop some initial business credit within the first six months. However, it generally requires about 12 months to establish a solid business credit foundation. To develop a strong credit score and a comprehensive credit profile, it may take three years or more, depending on how consistently and reliably you manage your credit activities.