An introduction to business credit: Everything you need to know

Business credit can benefit your business in many ways, or it can be a tricky obstacle. Your business credit works in the background affecting things like interest rates, credit card approvals, and the terms of business agreements.

Many business owners don’t understand business credit or even know it exists. If you’re in one of those camps, this blog is for you. We’ll explain everything you need to know about business credit:

• What is business credit?
• How do you apply for business credit?
• Why is it important to establish business credit?
• How do you build business credit?

What is business credit?

Business credit is a form of credit in a company’s name that signifies its ability to borrow. Your business credit score influences your access to credit products like credit cards, loans, suppliers, and vendors. Your credit score is a main indicator of your likelihood of paying off current and future debts.

Let’s dive deeper into the workings of business credit.

Differences between personal and business credit

Business credit works similarly to personal credit, but a few differences exist.

• Most lenders and credit card companies report to credit bureaus. Not all companies report payment history to business credit bureaus.
• With your personal credit, you can only have one personal credit profile attached to one SSN. With business credit, you can have unlimited business credit profiles attached to the number of businesses you have.
• Your personal credit is connected to your SSN. Your SSN enables government agencies to identify individuals for their records and financial information. Your business credit is linked to your Employer Identification Number (EIN). This number is how the government identifies businesses for tax purposes.

Why is it important to establish business credit

Put simply, business credit is how lenders, banks, and interested parties determine the financial health of your business. Establishing and maintaining good business credit can make running your business easier. Here’s how.

Loan qualification

Poor credit history or a lack of credit history is the main reason lenders reject loan applications from small businesses. With good business credit, you increase your chances of lenders saying yes. More than that, you have more bargaining power to negotiate favorable terms and lower interest rates.

If your business doesn’t need any loans, should you still build business credit?

Our answer is yes. You never know when your business will need to open another line of credit or secure a loan. It could cost you nothing or very little to start building business credit and add value to your business. And yes, your business's available funding adds value to it if you are to sell it one day.

Prepayment 

Certain B2B vendors will require prepayment for their goods and services. There's an added benefit to establishing good business credit and a relationship with vendors. Doing so could mean not needing to put any money down when ordering. You can also negotiate with vendors who you perhaps order in bulk from.

Good business credit isn’t just about securing funding; it’s about managing cash flow. A general cash flow principle is that delaying payments out and expediting payments into your business is better. 

Separates personal from business

Many startups are funded partly with the founder's personal capital. This is normal, as cash is king in any stage of business. As your business grows, so does the need to separate your personal from business. 

Your business should exist as a separate entity. This means the money in your business checking belongs to your business, while the money in your personal checking belongs to you. The same rules should apply to your personal and business credit. By establishing your business credit, you’re taking the first step towards separating your business and personal finances. 

Insurance rates

Poor credit history can also impact insurance rates. Many business owners don’t know this, but statistics show that people with higher credit scores file fewer claims than those with lower credit scores. Therefore, federal law allows insurance companies to look at your credit report. Business insurance companies do not have to notify you that they are inquiring about your credit report.

How to establish and build business credit

Now you know what business credit is and why it’s important. We also discussed three differences between personal credit and business credit. However, there is one similarity between personal and business credit. To get a personal credit score, you have to start using credit, meaning many people don’t have a credit score. The same is true for businesses. If you want a business credit score, you need to use credit to establish it.

Let’s discuss the steps involved in establishing business credit.

Step 1: Register your business with your state

Your business is likely already registered with your state as some form of a business entity like an LLC, sole proprietorship, or corporation. To start your business credit profile, you will need the information provided to you when you register your business. You can visit your local Secretary of State office or register your business online. 

Step 2: Get an EIN

An EIN is the business equivalent of a Social Security number. Multi-member LLCs, partnerships, or LLCs are required to file for an EIN during business creation. Single-member LLCs and sole proprietors are not required to get an EIN, so you must apply for one afterward. 

Step 3: Get a DUNS number

Next, you want to register for a Dun & Bradstreet number, also known as a DUNS number. DUNS stands for Data Universal Numbering System and is a system developed by Dun & Bradstreet. This system assigns a unique nine-digit identifier to a single business entity. This identifier lets the agency track your business’s credit score. A DUNS number is required to apply for federal grants. Lenders and potential business partners can use your DUNS number to help determine a company's reliability and financial stability. 

Step 4: Open a business credit card

The fastest and most accessible way to establish and grow business credit is to get a business credit card. For most businesses, this is the last necessary step to access a vast supply of credit and lending options. Most major business credit cards report to three main commercial credit reporting agencies (Dun & Bradstreet, Equifax, and Experian). 

You may ask. How will credit card companies determine if I qualify for a business credit card? The answer is that they’ll use your personal credit scores and income to determine if you qualify. This means that business credit is available to startups and small businesses.

Tip: If you’re worried about qualifying for a business credit card, open a business checking account with your preferred bank first. This allows you to establish a rapport with them before applying for a business credit card.

Step 5: Use your credit responsibly

With personal and business credit, similar factors affect the quality of your credit score. The most important factor is your payment history, specifically whether you pay the full amount before the payment due date. Past payment history is the #1 predictor of how likely your business is to pay on time in the future.

Another factor is credit utilization, the amount of revolving credit you’re currently using divided by your total credit limit. A high credit utilization may indicate that you’re spending more money than you actually have or making poor financial decisions. 

As a business owner, you know that some months, especially in the startup phase, require financial risks. Credit bureaus know that, so they won’t punish you harshly for a high credit utilization for a few months. It can damage your business credit if it persists for many months.

Other smaller factors are the length of credit history and the mix of credit types.

Step 6: Explore other avenues to build business credit

Credit cards aren’t the only way to build business credit. Lenders, B2B suppliers, and vendors may also report business credit. They are not required to do so, but it can affect your business credit score if they do. 

Suppliers often extend credit allowing their customers to pay several days or weeks after they receive inventory. 

How long does it take to establish business credit?

Business credit scores, which generally range from 0 to 100 can take a few months to appear on a business credit report. What is considered a good business credit score is subjective, but experts suggest doing so can take three years.

Does personal credit affect business credit?

A lack of business credit should never detract you from starting a business since you need a business to have business credit in the first place! In the interim, creditors and lenders will assess your personal credit to determine if you qualify for business loans and credit cards.

How to check your business credit score

You can get a copy of your company's report from Experian, Equifax, Dun & Bradstreet, and other credit reporting services.

Take control and understand your finances

Understanding business credit and how it applies to your business is crucial. Yet, according to Nav, 45% of small business owners don’t know they have a business credit score. More than 82% don’t know how to interpret their score. 

Business credit isn’t the only thing that business owners struggle to understand. Many business owners struggle to understand how their taxes work. A lack of knowledge about business credit and taxes can leave your business in financial limbo and limit your potential. ComplYant can help your business take the guesswork out of tax planning and budgeting.