Nearly half of small businesses use personal credit to fund their expenses — but this means they’re failing to create a clear boundary between their personal and business finances.
Although it’s sometimes the only option, it’s not the best. By establishing business credit instead, you can help grow your company and give it the capital it needs to hire staff, cover daily expenses, and take care of the general cost of doing business.
Business credit ultimately helps fuel your business, leading to expansions and longevity. If you want to build business credit, you’ve come to the right place.
How Does Business Credit Work—And How Is It Calculated?
Business credit works the same way as personal credit. However, it reflects a business's financial history, not an individual's, and plays a critical role in determining its creditworthiness. The process involves major business credit bureaus keeping track of your business credit info, closely monitoring payment history, debt levels, and the age of your business to generate a score.
Credit bureaus will mainly look at three objectives:
- Whether you make payments on time,
- How much debt you have, and
- The age of your business.
In most cases, the longer the company has existed, the higher the score. Bureaus may also consider new credit and the type of credit mix.
Good business credit is not only significant for loans and other credit approvals but can also act as a leveraging tool in business relationships. For example, a better score could lead to reliable relationships with vendors and suppliers, demonstrating your superior credit utilization skills. You may even use it as a negotiation tool to show how dependable you are as a loanee or partner, opting for better deals. Regularly updating and validating your business credit info to ensure accuracy can go a long way in fostering trusted business partnerships.
The Difference Between Personal Credit and Business Credit
If you’re a business owner, you need to have good personal and business credit — but what’s the difference?
Difference #1: They’re Determined Differently
Payment history, amount of debt, new credit, and the average length of an individual’s personal credit history are all factors that depend your personal credit scores. These factors also play a significant role in determining your loan eligibility. Your business credit file, another critical aspect of loan eligibility, is shaped by your payment history, age of credit history, debt and debt usage, industry risk, and company size.
Difference #2: There Is No Dedicated Credit Bureau for Businesses
Three credit bureaus currently determine personal credit: Equifax, Experian, and Trans Union. However, when it comes to business credit, things are not as straightforward—your score comes from different sources, including public records, business entities, and data furnishers, such as the D&B business credit report, which requires a unique DUNS number for your business. You can request a DUNS number for free online to potentially qualify for certain federal government contracts and grants.
Difference #3: They’re Ranked Differently
Most business credit scoresare ranked on a scale of 0 to 100 or 0 to 300 (if scored by the FICO Small Business Scoring Service). These scores are key indicators that can help banks, including businesses like Mastercard, decide whether or not to lend money and at what rates. According to the FICO SBSS, a range of 155 to 165 is ideal for loan approval.
On the other hand, personal credit scores are ranked using a range of 0 to 800. Unlike business scoring, most institutions, Mastercard included, will only consider lending or financing if a person’s score is at least 610 to 640. Overall, your personal credit score can be seen as a major indicator of your financial stability and reliability.
Top 3 Major Business Credit Bureaus
Although there is no single standard for business credit scores, several credit reporting agencies can help you assess your business credit report. The three most widely-used agencies are D&B, Experian, and Equifax Small Business.
#1: Dun & Bradstreet (D&B) Credit Score
Within D&B are multiple business credit score options — the most popular being the PAYDEX Score. The PAYDEX Score, listed prominently in the directory, considers public records such as legal filings, industry data specific to your business's size and industry, and other historical data that D&B collects. This score, vital for federal tax filings and essential when opening a business bank account, ranges up to 100 points. It reflects your payments and scrutinizes whether debts were paid off promptly.
#2: Experian Business Credit Score
Experian collects information from various sources like credit card companies, corporate financial institutions, banks, and collection agencies to determine your score. It also considers your time in business, the size of your business, and the Standard Industry Classification (SIC) codes to formulate your score.
#3: Equifax Small Business Credit Score
Equifax collects data from the Small Business Finance Exchange (SBFE) and transforms it into a credit report. Primarily, this data serves as a reflection of how small businesses interact with lenders in the United States, which is why many banks will scrutinize your Equifax credit score when you apply for a loan. This score provides valuable insights into your business' credit standing, affecting your financing options. In scenarios where you're working on improving your business and personal credit, explore alternative solutions like merchant cash advances.
How to Build a Good Business Credit Score
While it may be tempting to focus on the “fun stuff” — like branding, marketing plans, and getting a dedicated business phone line — your next step should be building business credit and ensuring your score falls within an acceptable range.
Then, you can begin working with vendors, qualifying for loans, and applying for credit cards that can help your business succeed.
Step #1: Register Your Legal Business Name
First up, you should establish your business and legally register its name. Weather it's a sole proprietorship, a C corporation, an S corporation, or a limited liability company, you need to define its legal status depending on where you’re operating and the type of business you’re launching. This might involve registration at federal, state, or local levels. Looking for more information? Check your state’s requirements. When registering your legal business name, you can apply for a DBA. To define DBA - a “DBA” stands for “doing business as,” also known as an “assumed name” or “fictitious name,” which is the front-facing customer trade name used under the various corporate entities such as limited liability company or S/C corporation.
Step #2: Obtain a FEIN or EIN
A FEIN or EIN is a unique and exclusive nine-digit ID assigned to your business by the Internal Revenue Service (IRS) for tax purposes. You’ll need one to operate your business, make and receive payments, and hire employees. If you don’t yet have one, you can get your EIN online.
Step #3: Open a Business Checking Account
A business bank account that’s separate from your personal account is essential. Not only does it ensure a clear separation between your personal and business finances, but it also assists in maintaining a distinct credit history for your venture. This, in turn, can influence the business benefits attached to a good business credit.
Plus, the partition enables easier tracking of expenses—a critical factor for ensuring profitability—and simplifies the tax filing process by delineating personal and business finances.
A business checking account is REQUIRED for most if not all business lenders.
A dedicated business bank account also lends credibility to your business in the eyes of vendors, suppliers, and lenders. They can scrutinize your statements and ascertain regular business transactions with other businesses or consumers, thereby instilling faith and fostering relationships.
Step #4: Open a Business Credit Card
Business credit cards are a great way to reap unique benefits offered by credit card companies, like extensive credit limits, great rewards, and more cash back. They also serve as a useful platform for securing startup loans that can reinforce your business funds. A business credit card can help establish your credit history, vital for future financing arrangements - be it for business expansion or car financing. As long as you don’t max out your card and pay it off on time and in full every month, you'll set yourself on the path to an excellent score. Remember, however, to read terms carefully as financing that doesn't require good credit can be expensive.
Step #5: Establish a Business Credit History
This step will take some time, but it’ll be worth it in the long run. Once you've covered the basic legal aspects of your company, you should start by establishing vendor accounts with suppliers that report to one of the business credit agencies, effectively beginning to build your business credit file. Building business credit is not something you can happen overnight because credit bureaus will evaluate your vendor credit accounts and your payment behaviors that span months. Typically, it’ll take between three and six months to calculate a score — with a high score taking a bit longer.
Step #6: Register Your Business with Internet Directories
This isn’t a legal must-do, but registering your business online will give your brand credibility. To enhance this credibility, it is essential to have a presence on multiple platforms. This includes having an accessible website and creating pages on platforms like Facebook. Strong online footprint will not only bring more customers and sales opportunities but will also ease the establishment of relationships with vendors and other businesses.
The Bottom Line When It Comes to Business Credit
As a business owner, navigating through everything you need to do can feel like a never-ending puzzle—but building good business credit should be one of the most important pieces. Our upgradeable marketplace offers advanced features for this. Good credit can open doors for your business, such as better financing opportunities and positive relationships with vendors and suppliers. Just be sure that when you open your business, you stay on top of your credit by always paying on time, never maxing out, and checking your score regularly to see what you could do better. As a part of this, it becomes crucial to view additional scores and ratings or learn what industries are making these requests. After the 14-day period, we recommend that you upgrade to our paid credit monitoring or credit building solutions.
And if you need a loan today, check out what options AdvancePoint Capital has available for you. Get your instant quote now.
