Many small business owners apply for funding to cover operating expenses or support their growth, only to discover that they cannot qualify because of a lack of business credit or poor business credit.

When you’re focused on day-to-day operations and seizing opportunities to grow, it’s easy to forget about building a strong credit history for your business. But establishing and building good credit for your business is vital for all small business owners, regardless of the size or type of business or how long you’ve been in operation.

It’s not unusual for new businesses to have a thin credit profile—in fact, new businesses may not have a credit score at all, which means these business owners will need to rely on their personal credit score or other personal financing options like credit cards or savings to support their business. This strategy may work in the short term, but it can lead to significant challenges down the line when it’s time to grow your business.

If you’ve been in business for years, you’ve likely already established a credit score, especially if you have a business credit card or lines of credit with your suppliers. But if you have a history of missing or late payments or high credit utilization, chances are your credit profile may need a little TLC.

Whether you’re starting from scratch or hoping to improve your current credit score, business credit takes time to build. There’s no way to rush the process, so it’s best to start as soon as possible.

But before you start building credit for your business, it helps to understand what exactly business credit is and why it’s so important.

What is a business credit score?

Your business credit score assesses your ability to meet your financial obligations, such as paying bills and invoices on time. Essentially, your credit score measures your business’s creditworthiness—or, in other words, your ability to qualify for small business financing.

Business credit scores are assessed by credit reporting agencies like Dun & Bradstreet®, Experian®, or Equifax®. These companies collect information from a variety of sources, then use a credit reporting algorithm to calculate your business credit score.

Many factors go into how your business credit score is calculated and each credit reporting agency uses a different combination of factors. However, there are some common factors that you can expect to impact your credit score regardless of credit reporting agency, including:

  • Payment history
  • Collections history
  • Lawsuits, liens, and judgements
  • Credit utilization (more on this later!)
  • Public records
  • Company size
  • Industry risk

PRO TIP: Not all business credit scores are considered equal. Different agencies create and sell their own scores, including FICO®, Dun & Bradstreet®, Experian®, and Equifax®. Some lenders prefer scores from certain providers, so check with your lender before you pay for a credit report to support your funding application.

Why build business credit?

The most convincing reason to establish and build business credit is the impact it will have on your business’s borrowing power. Having a strong business credit score significantly improves your chances of approval when you’re applying for small business funding from traditional lenders like banks and the SBA, as well as alternative lenders.

A strong credit score also improves your chances of securing more favorable terms on small business funding. Businesses with good credit often qualify for better interest rates and terms, as well as larger loan amounts.

Establishing and building business credit offers a number of other advantages beyond improving your borrowing power, including:

  1. Safeguarding your personal assets. Before you establish strong business credit, you may need to sign a personal guarantee to open a credit card or apply for a loan. This means you’ll be personally liable if your business can’t repay what is owed and that your personal assets will be at risk. Once you establish business credit, you may be able to qualify for a business credit card or other small business funding without a personal guarantee.
  2. Better terms with vendors and suppliers. In addition to improving your chances of getting funding with better terms from traditional and alternative lenders, a strong credit score can also improve your repayment terms with vendors and suppliers.
  3. Lower insurance premiums. The history provided in your credit report is a strong indicator of whether your business is likely to pay its insurance premiums on time. For this reason, a strong business credit score may result in lower insurance premiums.
  4. Reducing prepayments. Good credit tells suppliers and vendors that you can be relied on to pay your invoices on time, which means you may not be required to prepay for products or services purchased.

How to establish business credit for the first time

If you aren’t sure whether you’ve already established business credit, you can check your credit score (for a fee) at one of the three major business credit bureaus: Dun & Bradstreet®, Experian®, and Equifax®. If you use a personal credit card for business expenses, chances are you do not have business credit.

Here’s what you need to do to establish business credit:

1. Incorporate as a C-corporation, S-corporation, LLC, or LLP

Incorporating officially will ensure that your personal and business identities remain separate. If your business is structured as a sole proprietorship or a general partnership, your personal and business financials will legally be considered the same, and your personal and business credit rating will be the same as well.

2. Get a federal Employer Identification Number (EIN)

Also known as a Taxpayer Identification number, this unique nine-digit number is assigned by the IRS at no cost to identify businesses operating in the USA. An EIN is basically a Social Security number for your business, and your business credit will be tied to your EIN in the same way that your personal credit score is tied to your SSN.

3. Establish a separate business address and phone number

Establishing an official address and contact number allows you to register your business with directories like the Better Business Bureau. Credit reporting agencies will include information about your business from these directories when calculating your credit score.

How to build good business credit

Once you’ve set up these basic requirements, you can start building credit for your business. Here’s what you can do to build strong credit for your business:

1. Open a business bank account

A business bank account should be opened in the legal name of your business. Once it’s open, all business payments should be made from this account, including utilities, rent, and payroll. This will help establish a separate financial identity for your business and keep your business finances distinct from your personal finances.

2. Get a business credit card

Once you’ve established credit and opened a bank account, you may be able to qualify for a business credit card. As soon you can, start using this card to make business-related purchases—this will initiate movement from credit reporting agencies.

Using a business credit card responsibly is one of the simplest ways to build your business credit, but it is not an invitation to go into debt. Paying your full balance on time is the best way to establish good business credit—missing payments will do you more harm than good, and will actually depress your credit score.

PRO TIP: Make sure you open a credit card with an institution that reports to credit agencies. Most major credit card providers will report your activity, but you should always be certain before you sign up.

3. Establish a line of credit with vendors and suppliers

If you have been paying vendors and suppliers with cash on delivery, ask for a credit application and start paying a monthly invoice instead. After some time (and once you’ve established a history of on-time payments), you can ask the supplier to report your payment history to the credit bureaus. If the vendor doesn’t report your good history, the reporting agencies will never know and this good behavior won’t be reflected in your business’s credit score.

4. Pay your bills on time

This one can’t be stressed enough—paying your bills on time, or ideally early, is critical to improving your business credit.

Try your best never to carry a balance on your business credit cards or vendor accounts. Making late payments will have a negative effect on your business credit, especially if you have a history of missing payments or your late payments are escalated to a collections agency.

5. Watch your credit utilization

Credit utilization is a major component of how your credit score is calculated.

Just because you have access to a certain credit limit doesn’t mean you should always spend up to that limit. It’s often recommended that business owners use no more than 30% of their available credit—this proves to lenders that you’re financially responsible, and that you’ll be able to make your payments on time every month.

If your credit utilization is high, this may indicate that you are close to delinquency on your payment obligations. This can negatively impact your credit score and significantly influence your chances of being approved for small business funding.

6. Consider small business funding from an alternative lender

Paying your bills on time is the most effective strategy for building and improving business credit, but one other common tactic is to take out a small loan and pay it off on schedule (or early). A successful round of funding can have a positive impact on your business’s credit rating and will put you in a stronger position to receive more funding in the future, especially if you work with the same lender.

Getting a small business loan from the SBA or another traditional lender like a bank is difficult for even the most established businesses with proven financial histories. Applicants with strong credit scores are often rejected, so how can you access small business funding if you’ve just established business credit or are working to build a stronger score?

Alternative lenders like Kabbage, OnDeck, and Greenbox Capital have different approval requirements than traditional lenders. Instead of focusing on your credit score, these lenders consider the overall health and potential of your business, which means they can approve more loans than traditional lenders, including for businesses with low credit scores. Alternative lenders can also approve loans as small as $3,000, while traditional lenders often prefer to grant larger loans because they’ll make more money over the lifetime of the loan.

7. Monitor your credit regularly

There may occasionally be errors in your credit history. Check your business’s credit score every six months—if you spot any inconsistencies or errors, you can file a dispute and ask for a correction.

Final thoughts

Establishing and building strong credit should be a top priority for all small business owners regardless of business size, type, or age. Good credit offers your business a number of advantages, including:

  • Greater borrowing power and a higher likelihood of receiving larger funding amounts with better terms and lower fees
  • Security for your personal assets
  • Better payment terms with vendors and suppliers
  • Lower insurance premiums
  • Fewer prepayments on products and services purchased

Once you’ve established credit, the best way to improve or build a strong credit score is to pay your bills on time, including routine operating expenses like rent, utilities, and payroll, as well as your business credit card. Receiving and successfully repaying a working capital loan from an alternative lender can also positively impact your credit score, and may give you the boost you need to raise your credit rating or fuel your growth.