How to Establish Business Credit: 6 Steps That Separate It From Your Personal Score

Many business owners assume if they pay the business bills the business credit is automatically reported to the business credit bureau and they have good credit. Or they feel they have credit because they have credit cards in the business name. Well, you may have a surprise coming. Most likely, you have little or no business credit.

Business credit is separate, and needs to be built just like personal credit. You need to incorporate (Step 1), get an Employer Identification Number, known as an EIN (Step 2), get a DUNS number from Dun and Bradstreet (Step 3), a business bank account (Step 4), open vendor accounts that report (Step 5), and work on having a business credit card (Step 6). Once you get that done it takes time for it to build up, usually 12 to 24 months.

Your personal score still matters as it relates to business financing, especially where guarantees are required. Even though you are building business credit, many lenders will also look at the owner’s personal score initially, and some will continue to do so. Your personal credit won’t be the only factor in determining whether you’ll be approved and for how much, but it’s a starting point. Eventually, the assumption is that you are building your business credit, and your personal credit score should become less relevant. On the business side, there are three major agencies that offer business credit reports and scores: D&B, Equifax, and Experian. Each uses a proprietary system and a different model to calculate them.

But why bother? There’s several reasons. For starters, many lenders give less weight to personal guarantees once there is business credit. Others will offer lower rates and higher limits. Finally, there’s a very simple reason: businesses get different credit terms, often net 30, which is effectively free working capital.

Establishing Business Credit

The process starts by incorporating. A sole proprietorship is not a separate entity from the owner, and the owner can be held personally liable for the company’s debts. You do not want to incur a debt that can follow you home. Register your LLC or corporation with the secretary of state before obtaining an Employer Identification Number, or EIN, for the business, or the application may be delayed.

Your next step is to get that EIN from the IRS. There is never a fee to get an EIN, and it is issued immediately online if you are approved through the online application. Step three, your DUNS number, is issued by Dun & Bradstreet, and also is free. Be aware, however, it can take up to 30 business days for them to issue it. It is what D&B uses to tie all business credit activity back to your company.

Step four is to get a business bank account in your company’s legal name. There should be one account for your business and one account for your personal finances, and one should never mingle with the other. Use that only for business transactions, or you may not be viewed as a separate entity. A bank will usually ask for your EIN, articles of incorporation or formation, business license, and perhaps other business information. Also, get a business phone and address.

Step five of building credit is to get net 30 vendors that report to the business credit bureaus. The way the traditional trade credit system works is that you buy on Net 30 terms (with payment due in full 30 days) and pay on or before the due date. Do not assume a vendor will report to a business credit bureau without asking. Most companies do not. Uline, Quill, and Grainger are reputable, for example, and might carry what you need, and they all report to business credit bureaus. Once you are accepted by one vendor, pay your bills early, and stick with small purchases until you have established good business credit.

Dun & Bradstreet’s PAYDEX runs from 0 to 100, with 100 being the highest possible score. Paying 30 days early earns you a score of 100, while paying on time earns you a score of 80. As a general rule, lenders prefer at least a 75. Paying a net 30 invoice in five days is much better, score wise, than paying on day 28, though on time payment will give you a good score to begin with. Three to five vendor accounts reporting to the credit bureaus in three to six months is an excellent way to start. That’s the cornerstone of establishing business credit, and can lead to business cards and future loan approval.

Step 6 is to get a business card that reports to the business credit bureaus, and pay it off in full monthly. Watch out, because many report only to personal bureaus, even if they appear to be strictly for business. That is a real waste of opportunity.

Credit Mistakes to Avoid

Business credit mistakes to avoid include mixing personal charges into the business account, too many credit applications in too short a time, and not checking D&B, Experian, and Equifax to make sure they have accurate information about you at least once a year. You can have errors on those reports you don’t know about. So make any dispute needed to set the record straight.

The timeline for building business credit is roughly three months to get the EIN and DUNS number and set up with good vendors, then months three to six for reports, followed by your first credit card in that time frame. In six to twelve months you could have a good PAYDEX of 75 or more. In 12-24 months you can have a strong credit profile.

You cannot microwave or rush the process of building business credit. No one likes the word patience, but it’s just how it is. Be careful of quick fixes. Remember that the credit bureaus look at the company, not the owner, if you follow these steps. Once you have business credit, after months of responsible and regular use with numerous vendors and entities, go for the higher limits and, ultimately, the business loans you need for future funding needs.