your business credit score

How to Build Business Credit – Step by Step Guide

Preparing your business for growth requires proper accountability and funding access. The most important thing that business owners tend to forget is that business credit matters. You don’t want to be personally liable for all your company’s debt. With that said, read this guide on how to build business credit to set your company up for financial greatness.

Preparing Your Business to Build Credit

Before building credit you must establish your company as a borrower. This process involves getting set up by all legal standards. Your business will need to get incorporated so it’s its own entity, you’ll need an EIN number, business licenses and permits, etc.

Here are the crucial steps to take to prepare your business for credit growth.

Step 1 – Incorporate Your Business

Decide the name of your business if you have not done so yet. Then, check with Dun & Bradstreet to make sure that name is not already registered. You can search here to see if any other trademarked entities actively use that business name. If not, you still must search the trademark database to be certain it’s a usable name.

Have your name ready?

Now is the time to make your business incorporated. This action will separate your company from yourself and make it an official legal entity. By doing so, lenders can write loans to your business directly and you don’t need to be personally liable. Not to mention, as an incorporated business you’re not personally liable for any of your company’s contractual obligations.

Make sure to study the different ways to incorporate to decide what’s right for your business. You can also use this website to order and pay for your incorporation needs. They will handle the business name verification, prepare and file all necessary documents, obtain your EIN number, plus much more.

Step 2 – Give Business Info to Credit Bureaus

Next step is to provide the credit bureaus with your business’s information. You must determine your business’s legal name and its address. These details should line up between all your DBA filings – supposing you wish to do business under alternate names. This information needs to coincide and all link back to your business’s true legal name and address. Otherwise, if a creditor reports an account with business name B it might not apply to your business’s credit report.

In short, make sure to use consistent information for all credit report related encounters. Give the same details whether you are opening a new vendor account, applying for a business credit card, setting up utilities, signing a lease, etc.

Make sure your business’s address is legitimate. Check the address verification tool from Experian to confirm your business’s address legitimacy. You want to avoid tying your business to any location that comes up as “residential or mail stop,” which is primarily home residences. If you search for your address and you get a result of “business or unknown,” your address should be sufficient.

What’s the difference? Mainly, some lenders will not provide loans to businesses that use home addresses. You might also run into issues if you avoid using a physical address – for instance, a lender might refuse to work with you if your business uses a PO box.

Step 3 – Get a Business Checking Account

Your business needs to have its own bank account. Prospective lenders will only see inherent risk if you combine your personal and company finances. In fact, this issue becomes a primary reason for getting rejected once a potential lender starts examining your business’s cash flows. For this reason, and because it makes accounting easier, you definitely want to establish a business checking account from day one. Furthermore, having a separate checking account for your company is a requirement when you go for a business credit card.

Interestingly, your business checking account also dictates your business’s age. Most lenders will look at how old the bank account is, not when the company was registered. Why is this? It’s because many companies exist “by idea,” only to get brought to life years later. The sooner your business is financially existent, the better.

Collect a copy of your business certificate, any IRS documents stating your company’s EIN number and your incorporation paperwork. This information will be needed when you apply to open a business bank account. Further, you should look into setting up a PCI-compliant business merchant account (example) if your company accepts debit and credit card payments.

Step 4 – Establish Your Business Plan

Banks, investors, lenders, the Small Business Administration, and many others, want to see your business plan to know your goals. A clear and concise business plan should be prepared before you start establishing credit under your company’s name. This criteria will be made clear once you attempt to get a business loan. Use business plan software to simplify this process.

Checking Your Credit Report Status

The next stage is looking at your credit reports and understanding how business credit works. This process will be more educational than preparation. However, there is an extremely important step in the midst – registering a DUNS number. Regardless, you should go through all of these processes to best prepare yourself for your credit building journey.

Step 1 – Understand How Business Credit Bureaus Work

There are three major credit bureaus that handle business credit files. These bureaus include Equifax, Experian and Dun & Bradstreet – which means TransUnion is irrelevant here. Some things to note about each of these bureaus include:

Equifax: Some credit card issuers use your Equifax Small Business credit report to determine your business’s eligibility. Out of the three, businesses struggle the most to get filed under Equifax’s business side. You cannot simply open an account in your company’s name; your business only gets listed under Equifax after a business supplier, creditor or lender reports your account to them.

Experian: Some credit card issuers use your Experian Business credit report to determine your business’s eligibility. Getting your file listed here is easy – in fact, they have more than 25 million businesses in their database. However, self-reporting of trade references is not permitted here.

Dun & Bradstreet: Both credit card companies and traditional business loan issuers will use your Dun & Bradstreet credit report. This agency has a whopping 230-plus million credit files in their database, almost 10 times more than what Experian carries. The majority of leasing agencies, lenders and suppliers will check your D&B credit file. This bureau should be your primary focus when building business credit – and to get listed, you need a DUNS number.

Learn How Business Credit Scores Work

Here’s a quick explanation on how business credit scores work…

Dun & Bradstreet

D&B’s proprietary scoring model is called the Paydex score. This credit rating is calculated by looking at how responsibly a business pays its creditors and suppliers. In this case, it’s possible to get a higher score by covering purchases before their payment due date. The most forward-acting businesses with financially sound accounting will do well here.

They also provide a financial stress score which varies from 1 to 5 and indicates your company’s performance as a borrower. This score is derived from category averages – D&B looks at how consistent other businesses perform and then they rank you accordingly. For this score, they evaluate businesses similar to yours by type and size.

Equifax

Equifax is home of the Payment Index which weighs economic capacity of a business. Their score range fluctuates from 0 to 99 based on the timeliness of your previous payments. Like with Dun & Bradstreet’s Paydex score, Equifax’s Payment Index weighs your payments with both creditors and vendors.

They also have a credit risk score that ranges from 101 to 992, which highlights the potential risk of your company failing to make multiple payments in the foreseeable future. Further, their business failure score runs between 1,000 and 1,880 and indicates the overall risk of your business going belly up.

Experian

Experian utilizes the Intelliscore credit rating model for business reports. This algorithm uses a score of 1 to 100 to determine which risk class you fall under. The higher your score, the less of a risk you appear as to prospective lenders. This credit rating evaluates your timely payments, any past write-offs, etc., and factors more than 140 data points in total. They also serve a Financial Stability Risk Score to showcase your insolvency risks.

Understand How Personal Guarantees Work

For a moment, it’s important to discuss personal guarantees. This term simply refers to any case where a creditor requires you to be personally liable for your business’s debt. This case is common when small businesses and startups first try to finance themselves. The personal guarantee is typically avoided by applying with quality business credit. Unfortunately, you will need at least four tradelines reported to Dun & Bradstreet before your business’s creditworthiness is even a factor.

The big problem with putting up a personal guarantee is its impact on your own credit report. Your credit utilization rate changes based on your business’s debt. If you default or miss any payments under your business, it damages your personal FICO score too. Also, if your personal credit is weak it might be impossible to qualify for a business credit card or loan. Remember this inherent risk and take it as a wake-up call that now is the time to start building business credit.

Step 2 – Make Note of Your DUNS Number

Now you need to get a DUNS number from Dun & Bradstreet. Locate your business listing (register if you haven’t already) and make note of your DUNS number. This number is provided to you when you first register your business with D&B. You will also find your number on any copy of your D&B credit report. Make sure to keep this number close to you as lenders will request it when you apply for business loans.

In a rush? Get a premium profile with D&B and receive your DUNS number within five days by setting yourself up through Small Business Starter.

Have accounts that need reported? Get your DUNS number right away and kick start the reporting process via CreditBuilder Plus™.

Step 3 – Get a Copy of Your Business Credit Reports

Your business likely doesn’t have any credit established yet. Even so, there’s a risk that your company was targeted by identity thieves. You should check your credit reports with Equifax, Experian and Dun & Bradstreet before starting to build credit.

Note: AnnualCreditReport.com does not apply for business files. You cannot receive your business credit reports for free – unless a lender supplies it in reference to why they rejected you. The simplest way to order your reports is through a service like BusinessCreditReports.com, where you can get all three reports with their scores in one place.

Step 4 – Consider Business Credit Monitoring

You should consider investing in business credit monitoring services like Creditsafe and D&B’s D&B’s CreditSignal. This way you can keep proper track of your business credit score changes and see how your credit building effort has paid off. With CreditSignal, you also receive a free copy of your D&B credit report which is definitely a plus.

Applying for Business Credit Cards, Loans, Etc.

Now you’ve reached the most important point in your journey. It’s officially time to take your credit-ready business and start establishing its creditworthiness. This process will involve setting up vendor accounts and applying for various types of business credit.

Step 1 – Apply for Vendor Accounts

Vendor accounts can be reported to business credit bureaus and will impact your business credit score as well. This avenue serves as the perfect way to quickly establish new tradelines. Throw up four separate vendor accounts and your payment history with them will help you get a reasonable Paydex score with Dun & Bradstreet. From there, it will be much less difficult to qualify for business loans and business credit cards without personal guarantees.

Step 2 – Apply for CD Secured Business Loan

Getting a business bank loan seems scary but a CD secured business loan is no challenge. Make sure you submit an application with your company’s legal name – the one which coincides with your EIN number. Make sure the bank is reporting this loan to Equifax, Experian and Dun & Bradstreet – not just one of them.

How does a CD secured business loan work?

You set up a CD account with an SBA-approved bank. You make a deposit into this account. You then get a business loan that matches your account balance. To qualify, all you need is acceptable personal credit – a FICO score close to 680 or so. You can always see if smaller banks will take you on if your credit score is much lower. Since the funds are secured by your CD account deposit, the lenders are a bit more trusting when financing this way.

This loan reports to your credit file the same as a typical loan. Unlike with personal credit reports, where secured credit cards are marked as such, there’s no demeaning notation here. Your business credit score will simply go higher and higher the longer you pay this loan in time. You will also get the interest on the deposited funds whenever you finish with the account.

Step 3 – Request Your Suppliers to Report to Bureaus

Some suppliers standardly report to business credit bureaus, but it’s not required. Contact your current suppliers and see if they already report. If not, request with them to start doing so for your sake – but make it known it won’t cost them anything to do so. If the supplier is easily replaced, you could even go as far as to state that you’ll take your business elsewhere if they refuse to report.

Step 4 – Apply for Business Credit Cards

Next you can start applying for business credit cards. The two options here are cards with personal guarantees and cards without. The latter is not publicly advertised much, but if your business is well established you can usually get away with just asking to remove the guarantee requirement. For most advertised business cards that don’t require a personal guarantee, your company needs at least $1 million in revenue per year.

That said, putting up a personal guarantee should be seen as a short-term plan. You can request the guarantee to be removed once you prove your business is responsible. Give it six months to a year before making this request. In the meantime, your business credit score will go up as you continue to responsibly pay your creditors and suppliers. This variable will add to your argument for taking off the guarantee.

Conclusion

So you wanted to know how to build business credit. That one little question spawns into a big lecture. The subject carries onto topics like how to register your business, incorporate, get credit reports and so much more. The last, yet most important part, details what ways your company can obtain new credit lines.

This journey is necessarily complex. Lenders want to know your business can be responsible. The requirements are more serious and that’s understandable. Some shortcuts exist, like using suppliers to build positive payment history. However, you must ultimately accept the building business credit is a long-term battle. Never wait, start right away and let the power of time work to your advantage – after all, you never know when you will need an expansion loan.