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. Each business credit bureau keeps track of your company’s credit history and generates a score. Good business credit allows you to qualify for loans and other types of financing.
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.
If you have good credit, you can use it as a tool in your business relationships. For example, a better score could lead to reliable relationships with vendors and suppliers. You may even be able to use it as a negotiation tool to show how dependable you are as a loanee or partner, which could lead to better deals.
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. Your business credit file is defined 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. But business credit is not as straightforward — your score comes from different sources, including public records, business entities, and data furnishers.
Difference #3: They’re Ranked Differently
Most business credit scores are ranked on a scale of 0 to 100 or 0 to 300 (if scored by the FICO Small Business Scoring Service). 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 will only consider lending or financing if a person’s score is at least 610 to 640.
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 considers public records, industry data, and other historical data that D&B collects. This 100-point range reflects your payments and whether you paid off debts on time.
#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. This data primarily focuses on how small businesses interact with lenders, which is why banks will look at your Equifax credit score when you apply for a loan.
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. Depending on where you’re operating and the type of business you’re launching, you may need to register federally, in-state, or locally. 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 corporate entity.
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 separate your finances, but it also makes it easier to track your expenses, and you’ll need to know the ins and outs of your expenses if you want to stay profitable.
Plus, keeping a boundary between personal finances and business finances makes it a lot easier to file taxes, too.
A dedicated business account will also make your business seem more credible to vendors, suppliers, and lenders. They’ll be able to look at your statements and verify that you have regular business transactions with other businesses or consumers.
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.
A business credit card also can help establish your credit history. As long as you don’t max out your card and pay it off on time and in full every month, you’ll be well on your way to an excellent score.
Step #5: Establish a Business Credit History
This step will take some time, but it’ll be worth it in the long run. You can start by establishing credit with vendors and suppliers that report to one of the business credit agencies.
Building business credit is not something you can do overnight because credit bureaus will look at your credit history and behaviors that go back for months. Typically, it’ll take between three and six months to calculate a score — and longer for a high score.
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. Credibility is crucial because you’ll bring in more customers and sales opportunities and more easily establish 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 neverending puzzle—but building good business credit should be one of the most important pieces.
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.
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