One powerful thing you can do for the success of your business is to have a strong business credit score. It sets the tone for the financial future of your business. Also, it gives you better loan terms, favorable supplier agreements, and lower insurance premiums. With that, here are the 11 simple ways to build a solid credit profile for your small business.
11. Open a Dedicated Business Bank Account
This is a non-negotiable first step that many entrepreneurs overlook. While business bank account activity doesn’t appear on your credit reports, most lenders and creditors require you to have one. It shows professionalism and financial separation to be taken seriously. While for incorporated businesses like LLCs and corporations, it’s a legal requirement to have to prevent the commingling of funds. It also creates a clean financial record where lenders can check to verify revenue and cash flow when you apply for financing.
10. Get a D-U-N-S Number for Free
Before you have your business’s credit history, major credit bureaus need to know that your business actually exists. With that, have a D-U-N-S Number, which is a nine-digit identifier given by the Dun & Bradstreet (D&B). It’s a widely recognized standard for business credit reporting worldwide. That’s like a Social Security Number for your business that will allow you to create a credit file for your company, which is a critical first step. You can (and should) register for this number for free from D&B’s website.
9. Formalize Your Business Structure
While operating as a sole proprietor is simpler, it will mean that you and your business are legally the same entity. Your personal assets are at risk if your business gets into debt or faces legal action. With that, forming a separate legal entity, such as a Limited Liability Company (LLC), creates a shield between your personal and business finances. This formal structure is legal protection plus a powerful signal for lenders, suppliers, and credit bureaus that you are an established business. It’s also a prerequisite for opening a business bank account and having a federal Employer Identification Number (EIN).
8. Maintain a Low Credit Utilization Ratio
The credit utilization ratio is the percentage of your available credit that you are using. It’s a need when calculating your credit score. For instance, you have a business credit card with a $10,000 spending limit and a balance of $3,000, then your utilization ratio is at 30%. The most creditworthy businesses maintain a ratio under 20%. Note that a consistently high utilization ratio can be a red flag to lenders, as it says that your business is overly reliant on credit.
7. Use a Business Credit Card Strategically
With that, one straightforward way to build business credit is through opening and responsibly using a business credit card. Choose a card from an issuer that reports your payment activity to major business credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Small Business. Some major issuers like Capital One, Chase, and Bank of America usually report to business bureaus. An advantage of this is that many business credit cards do not report your personal credit unless you default. Use them for everyday business expenses and pay the balance in full and on time.
6. Don’t Close Old Credit Accounts
You may think that closing old credit card accounts or lines of credit is a good practice. However, this will hurt your credit score. Closing an account actually reduces your total available credit, which instantly increases your credit utilization ratio. It can also shorten the average age of your credit history, which provides data for lenders to access your long-term reliability.
5. Keep Your Business Information Consistent
Frequent changes to your company’s legal name, address, or phone number can confuse entries to credit reporting agencies, which makes it difficult to track your credit history. It will make your business appear unstable. To avoid this, choose a permanent address and a dedicated business phone number. Also, ensure that your legal name is registered and used consistently across all platforms.
4. Leverage Vendor and Trade Credit (Net-30 Accounts)
Many suppliers and vendors offer what you call a trade credit, such as Net-30 accounts. This will allow you to buy now and pay later. With that, find vendors who report your payment history to business credit bureaus like Uline, Grainger, and Quill. These accounts don’t require a personal credit check, which makes them the perfect choice to establish your business credit file from scratch. Start by opening an account and making small but regular purchases. Pay invoices early to build a good payment history.
3. Secure a Business Line of Credit
After you’ve made a credit history with vendor accounts and a business credit card, apply now for a business line of credit. Unlike your usual term loan, which gives you a lump of cash, a line of credit is an account that will provide flexible access to funds that you can draw when you need them. A business line of credit is another positive record on your credit report.
2. Pay Your Bills Early, Not Just On Time
In the world of business credit, paying dues early can provide a good advantage. Business credit reports track a metric that they call Days Beyond Terms (DBT). It measures not just if you paid on time, but by how many days early or late you paid your invoices. A DBT of 0 is good, but a negative DT where you paid before the due date is better. This will lead to a faster increase in your credit score and more favorable terms with suppliers.
1. Dispute Errors Aggressively and Persistently
The most impactful thing you can do to improve your business credit is to find and fix errors that are likely included on your reports. When you spot an error, whether with an incorrect late payment or a misspelled business name, you must dispute this with credit bureaus immediately and persistently. Fixing them is a direct way to a healthier and accurate credit score.