How do I build business credit?
The first step to establishing business credit is to legally register your business. For small businesses, one option is to form an LLC (limited liability company) to ensure your company is seen as a separate business entity. Once you do that, you can begin to apply for business accounts in your company's name.
If your business is a sole proprietorship, you will need an employer identification number (EIN) to establish business credit.
Establishing Business Credit
When you open an account such as a business credit card or loan in your company's name, those lenders will begin reporting the accounts and payment history to the three business credit bureaus: Experian, Dun & Bradstreet (D&B) and Equifax. Experian will create a business credit file that lenders and partners can request to determine risk when doing business with you.
If there are any public records associated with your business, such as a judgment, lien or bankruptcy, those will be part of your business credit history as well.
Finally, demographic information such as years on file, Standard Industrial Classification (SIC) code and business size are also part of your business credit report.
The key to establishing a positive business credit history is to make sure you make all of your payments on time and keep your credit utilization, or amount of available revolving credit, low.
How Do I Get My Business Credit Report?
You can visit Experian's website to order a copy of your business's credit report. Experian also offers a credit monitoring service called Business Credit Advantage that can help you stay on top of your business credit history and business credit score. It provides alerts to any changes in your report and tips for improving your company's credit standing.
What's in a Business Credit Report?
A business credit report contains some of the same elements as your personal credit report. It includes:
- Your company's identifying information
- Account payment information
- Public record information
It will also include background information about your company and your business credit score.
How Is My Business Credit Score Calculated?
Business credit scores range from 0 to 100. A higher score represents a lower risk to lenders. The following are factors that contribute to your business credit score:
- Number of trade experiences
- Outstanding balances
- Payment habits
- Credit utilization
- Trends over time
- Public record recency, frequency and dollar amount
- Demographics such as years on file, SIC codes and business size
Keeping Business and Personal Credit Separate
While your business and personal credit reports are separate, small business owners often use their personal credit to apply for and secure credit accounts used for their business. Although it may seem necessary when starting out, using your personal name and credit when applying for a business account can be risky.
Using your personal credit when applying for an account means that you are agreeing to be personally responsible for the debt. As a result, that account and its payment history may appear on your personal credit history as well your business credit history.
If your business encounters financial difficulty and you are unable to manage those debts, your personal credit can be negatively impacted. Therefore, it's important to understand the risks associated with using your individual credit history to obtain business credit before opening accounts in your name.
Separating your personal credit from your business's credit as soon as possible will help protect both.
Thanks for asking.
Jennifer White, Consumer Education Specialist
This question came from a recent Periscope session we hosted.