When now-retired entrepreneur Larry Goodrich and his two partners started a small business, they were surprised to find it difficult to get a business line of credit. All three partners had impeccable credit ratings. They’d owned homes and dealt with the same financial institution for decades. So, they thought receiving business credit would be a slam dunk. But it turns out that business financing is a horse of a different color.

Credit isn’t the only way to fund a new business. In fact, the U.S. Small Business Administration (SBA) offers small business grants for start-ups and growing companies. But, there are strict rules about applying and qualifying for these funds. Many are also limited to specific industries or types of businesses. Some are only slotted for niche industries like biotech or “green” businesses, or women-, minority- or veteran-owned businesses. Even small non-profit organizations make the list. But many companies, like Goodrich’s, simply don’t fall into these categories. So, learning how to build business credit is crucial for many small business owners, especially if they want access to funds they can pay back over time.

What Is Business Credit?

The first thing to keep in mind is that small business credit is not the same as personal credit. Personal credit lenders offer credit cards and loans to individuals. They rely on three main credit bureaus and a wide range of credit scores, including FICO and VantageScore. In fact, they can use more than 1,000 types of credit scores to determine creditworthiness. Your individual credit rating depends on factors linked to personal wealth.

Business credit is tracked by your company’s Employer Identification Number (EIN), also known as your Tax Identification Number. Specialized reporting firms like Dun & Bradstreet monitor small business credit. So, you might hear about a “D&B” rating when seeking small business financing. Factors included in a D&B rating include your business’s overall risk, the potential for bankruptcy and how quickly you pay off your credit balances. If your company has higher risks, your D&B rating could make it harder to get business credit. Notice that your personal FICO score is not listed as relevant to determining your business’s creditworthiness.

Why Should I Establish Business Credit?

Don’t be tempted to use personal credit to finance your business. Experts say it’s important to keep your personal credit and business credit separate. Putting personal assets like your home on the line to guarantee a business loan can be devastating if things take a wrong turn.

A strong D&B business credit rating is vital. Lenders, suppliers, insurers and even your customers use it to decide whether to do business with your company. Let’s explore how to establish business credit as efficiently as possible.

Some companies help build business credit. For instance, those that allow you to purchase items or services with a net-30 account. Let’s say you open a net-30 account with a company that sells office supplies to small businesses. This means that the vendor gives you a line of credit for 30 days. They will front you the merchandise or services you need, but you don’t have to pay until after an invoice is issued or a shipment is made. Many of these vendors report transactional information to D&B, which will help you begin building your business credit record.

Once you’ve begun establishing business credit, it will be even easier for you to separate your personal finances from your business.

How to Start Building Business Credit

Beyond the net-30 strategy, there are other steps you can take to open a business credit file. In fact, your small business might already have a D&B rating, even if it’s been operating for only a short time. That’s because D&B continually gauges the stability and credit risk of other businesses. They gather information on companies and use it to build credit profiles for lenders. In fact, D&B can gather data like your number of employees and your sales figures from a variety of sources — including you! That’s right. You can update your company information with D&B, which will help you in building business credit history.

Establish Your Business Credit

Another important step in establishing business credit is getting a “DUNS” number. This is the identifier D&B uses to denote your business in their system. Getting a DUNS number is free, but plan ahead since the process can take up to 30 days.

Like D&B, Equifax and Experian monitor small business credit histories. To begin establishing business credit with these bureaus, work with companies that are known to report to them. To find out if a vendor reports to Equifax and/or Experian, simply ask. Start with their accounts payable department. You can also ask a sales representative or manufacturer’s rep.

You can also legitimize your business by registering as a genuine entity and getting an EIN from the IRS. Find more information on the IRS Employer Identification Number application website. When you’re ready to complete the application, do so during the site’s regular hours of operation: 7 a.m.-10 p.m. Eastern Time, Monday through Friday. While you can visit the IRS website anytime, it only accepts applications during those hours.

Once you have an EIN, you can:

  • Open a business bank account. This allows you to make transactions, handle payroll and accept payments. You can build a relationship with bank personnel who can help you stay profitable. They may even help connect you with others in the local business community.
  • Get a dedicated business telephone line. With this in place, customers, vendors, prospective employees, and other stakeholders can easily contact you with questions or orders.
  • Establish your business mailing address. Whether you have a brick-and-mortar presence or exist solely as an online entity, choose a business address to receive physical packages and other important deliveries.

These steps will go a long way toward legitimizing your operation and establishing business credit.

Apply for a Company Credit Card

Another useful step is to apply for a company credit card. For positive updates to your credit report, use your card frequently and don’t miss any payment deadlines. The National Federation of Independent Business (NFIB) has a credit card partner that offers a no-fee MasterCard account that can help you build your firm’s credit rating.

Your business credit card may provide additional benefits, including rebates and rewards, cash flow help, and simplified accounting (when purchases are automatically grouped into categories by the card issuer).

Build Relationships With Your Suppliers and Vendors

Staying on good terms with suppliers, vendors and customers is a must while building your business. When it comes to building business credit, place a special emphasis on those vendors and suppliers that report payments to business credit bureaus. For instance, pay off your net-30 accounts early whenever you can. More ways to keep your business relationships healthy include:

  • Paying your bills on time (early if possible)
  • Contacting vendors immediately if you are experiencing cash-flow or payment difficulties
  • Keeping promises (If there’s a time when you can’t, be proactive and explain why. Then do your best to make good.)
  • Being honest and admitting when you’ve made a mistake
  • Treating your employees well — they can be your best ambassadors
  • Asking customers to spread the word about good experiences and to come to you first if they are ever dissatisfied
  • Correct any service issues quickly and thoroughly to earn trust

While some of these steps aren’t directly related to building business credit, they can build credibility. And that goes a long way toward making your customers loyal and your business more successful.

Separate Business and Personal Expenses

Experts stress the importance of keeping your personal and business finances separate. IRS rules make personal interest a non-deductible expense, while interest paid for business purposes is generally deductible. If you’re ever audited, you’ll be glad you kept your business and personal expenses separated.

Plus, if creditors attempt to collect unpaid debts, they may be able to claim your personal assets if you haven’t maintained a clear separation. Finally, getting business loans or lines of credit is generally easier when business and personal finances are kept distinct from one another.

Incorporate Your Business

Many small businesses are “one-man bands” — they’re owned and operated by individuals as sole proprietorships. Independent business owners working as sole proprietors don’t have to file for legal status with the federal government. As a result, starting a business as a sole proprietor is a quick and easy way to open your doors, but it comes with some risks. For instance, it can be more challenging to get business credit as a sole proprietor, and individual owners have legal exposure if sued.

One way to limit your personal risk is to incorporate your small business. Becoming a Limited Liability Company (LLC) minimizes the chances that you’ll lose personal assets if your business is hit with a lawsuit. Our compilation of small business tips includes advice on LLC formation. For more details on how to form an LLC, check out this step-by-step guide. It includes guidance on choosing a name, filing paperwork and obtaining any necessary licenses, and other legal and regulatory requirements.

Monitor Your Business Credit History

As you would with your personal credit report, you should keep track of your business credit rating. Use the D&B updating service to keep your business profile updated and complete. Remember that your business credit score is a valuable asset. Protect it as you would your product inventory, your data, your physical assets, your proprietary processes and your patents. Any blemishes on your business credit history will negatively affect your prospects for growth and profitability. If you find errors or discover other issues, contact D&B. Not sure how to open a business credit file? Check out this helpful step-by-step guide.

Finally, business insurance can play a part in protecting your company’s assets. This will help you reach your financial and credit goals. We invite you to share your own insights on business credit with other readers in the comments below.

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