How to Build Small Business Credit

As an FBL reader, you know that proper managing of your personal credit and finances can help you reach your financial goals.

But as a small business owner (or serious side hustler/side business owner) you might not realize putting the same care and effort into building up a business credit profile can set your business up for future financial success.

Building your small business credit means you’ll be able to qualify for small business loans, lower interest rates on business credit cards, better insurance rates, and longer vendor payment terms should the need arise.

And just like a personal credit score, there’s a scoring model, determining factors, and 3 major credit reporting agencies that track everything. (Mind blown, right?)

But when it comes to building small business credit, some of the rules are different. The tips below can help you understand them better.

How to Build Small Business Credit

Business Credit Score vs. Personal Credit Score – How are they different?

Your business credit score (also known as a commercial credit score) is similar to your personal credit score in that it determines your creditworthiness to lenders.

But the way these scores are managed is completely different:

• Business credit scores are open and available to the public.
• Personal credit scores are private and can only be viewed with the permission of the account holder.

Who tracks the business credit score?

There are 3 major business credit reporting agencies and a handful of other agencies where you can view your report and score:

• Experian Small Business
• Equifax Small Business 
• Dun & Bradstreet (D&B)
• Other business credit agencies
• Nav – a 3rd-party business credit score resource (similar to Credit Sesame)

How is your business score calculated?

Unlike the personal FICO score, which ranges between from 300-850, business credit scores are based on a scale of 1-100; the higher the score the lower the risk:

• PAYDEX Score – Dun & Bradstreet – Score is 1-100. A high score indicates the greater likelihood a business will pay their debt on time.
• Intelliscore Plus – Experian Business –  Score range is 1-100, a high score indicates the business is a lower risk. T
• FICOⓇ LiquidCreditⓇ Small Business Scoring Service℠ (SBSS) – Score is 0-300; a higher score is better. Big banks and credit unions use this score for business loans; the Small Business Association (SBA) uses this scoring model to make decisions for their loans.

What factors determine your business credit score?

The business scoring model uses up to 5 factors to determine your score (while the personal credit FICO model uses 6 factors): 

• Payment history
• Utilization ratio
• Age of credit history
• Debt and usage
• Industry risk
• Company size

Now that you understand the differences between personal credit and business credit, here’s how you can go about building credit for your business.

 #1 Establish Your Small Business – (a.k.a. Make Things Legit)

By now, you should already have taken steps to start your side business; maybe you’ve grown it into a full-time gig.

Either way, if you haven't already, it’s time to make things legit and establish your business legally:

1. Form an LLC – Forming an LLC lets you take advantage of the benefits of both the corporation and partnership business structures. It also protects your personal and business assets and makes it easier to build business credit. It doesn't have to be an LLC either, just some type of business entity outside of yourself. Talk with an accountant to figure out which type of incorporation will work best for your business. (I didn't do this for the blog when I started it eight years ago and regretted it, so I did consult an accountant when starting several new businesses after I handed the website over to Soapbox. FOLLOW MY ADVICE! Talk to your accountant!)
2. Register your business name – According to the Small Business Association (SBA), your location and business structure determines how to register your business. If you’re doing business under a different name, register for a “Doing Business As” (DBA) license with your state.
3. Sign up for an Employee Identification Number (EIN) – An EIN is a Federal Tax Identification number used by the IRS. It’s the social security number for your business.  Sign up for an EIN online. It sounds complicated and like a lot to fuss with, but really it isn't and it's nice when you're trying to separate out business money from personal monies.
4. Get a physical address for your business – Check out your local UPS store, they offer small businesses a real street address. Don’t use your home address.
5. Get a separate phone number for your business – Add a separate phone line to an existing account or sign up for VoIP; Google Voice offers VoIP numbers.
6. Open a business checking and savings account – Open this account under your business name, EIN and address, and keep it separate from your personal finances.
7. Apply for a D-U-N-S number with Dun & Bradstreet – This step is not required, but applying for a DUNS number gets your business registered with one of the major business credit reporting bureaus. You’ll have access to your account and can make any changes as needed. Usually, this 9-digit identifier is required for any businesses that apply for an SBA loan, pursue government contracts, or offer lending/banking services.

After setting everything up, you can start building your business credit report.

#2 Start Borrowing Under Your Business Name

Now it’s time to start borrowing under your business credit profile.

• Apply for a business credit card that reports to one of the 3 major business credit reporting agencies. If you applied for a DUNS number, make sure the card you’re getting reports directly to D&B.
• Apply for a small business loan – Small business loans require more planning and effort than credit cards. You’ll need established credit and a written business plan, but they are attainable. You can try online with PayPal, or search for a microlender online.

#3 Pay Your Business Accounts Early + Monitor Credit Reports

Since payment history is a big factor in determining a business credit score, and you’re just starting to build credit, your payment history and debt usage would be making the most significant impact on your report right now.

You want to maintain good credit with vendors and card companies by paying bills early or on time, especially since some give credit for early payments.

And once you build up a credit history, monitor your credit reports. Errors can make a significant impact on your score, bringing them down and affecting your ability to get more credit.

Building and maintaining good small business credit is just as important as taking care of your personal credit. 

With good business credit, you’ll earn better loan rates, lower interest rates, and preferable insurance rates if your business needs it. Plus, a better credit score can help you scale your business in the future by making it easier to qualify for larger loans.

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