Business Banking

How long does it take to build business credit?

Contrary to the common belief that it takes three years in business, you can build good business credit in less than a year. Here's how to do it.

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Most experts say that it takes at least three years to build business credit. That’s justifiable since most business lenders require at least three years in business before approving credit applications.

But is there a way to improve your business credit profile in a shorter time? There are certainly things you can do to build business credit in under a year. For example, if you pay company debts before their due dates, your business credit score will rise significantly.

However, slow and steady is more likely to win the race for you, according to Nat Wasserstein of Lindenwood Associates, New York. So, while there are ways to up your business credit score in the short term, consider putting in place mid- and long-term plans for building business credit.

What is business credit?

Before we launch into how long it takes to build business credit, let’s start by defining it.

Business credit is a debt management profile of your business. The same way you have personal credit that’s based on your financial history, so does your business. The difference is that your company’s credit is based on its financial history, not yours. Thus, business credit is determined by how your company handles credit facilities like loans, lines of credit, credit cards, and trade lines.

Another difference between personal credit and business credit is that while personal credit is tied to your Social Security Number (SSN), business credit is tied to the business’s Employer Identification Number (EIN). Ultimately, business credit serves to show how reliable your business is in paying its debts, just as personal credit shows how diligent you are in handling personal debts.

Why is business credit important?

Business credit is important because it allows your company to use its own credit score to qualify for loans. As a sole trader, you can apply for small business loans, credit cards and lines of credit using your personal credit report. However, this is not recommended because it tangles up your personal and business finances. In turn, this can negatively affect your personal credit score as well as your business finances.

Want to learn the benefits of separating business and personal finances? Check out this guide.

Business credit is important because it allows you to apply for business loans while avoiding personal liability. In essence, the business entity becomes responsible for paying back the loan, not you as an individual. Here’s a full breakdown of why building business credit is important.

It increases access to business financing

Perhaps the most important reason for building business credit is that it gives your company a good business credit score. As is the case with personal credit, a good credit score increases the chances of your business qualifying for loans, credit cards and lines of credit.

According to the SBA, “businesses have 10 to 100 times greater credit capacity compared to personal credit”. In other words, you’re more likely to qualify for a loan if you use a business credit score rather than your personal credit score. This applies to all types of loans, including bank loans, online loans, SBA loans, and so on.

Encourages lenders to offer better loan terms

Lenders will use your business credit score to determine whether or not your company qualifies for a particular loan product. For example, you can easily pre-qualify for the SBA 7(a) business loan if your FICO SBSS score is 140 or higher. On the other hand, if the score is lower than 140, your business won’t even pass the pre-screening process.

It doesn’t end there. The business credit score will also determine how much money your business qualifies for and the kind of interest rate to accompany the loan. Oftentimes the higher the business credit score, the more money you can get.

Plus, your business is more likely to get a low interest rate if it has an established credit history. That’s because good credit portrays you as a diligent borrower who poses minimal risk to the lender. Most banks, credit unions and online lenders won’t hesitate luring you to their credit facilities with low interest rates, provided your business has a good or excellent credit history.

Therefore, even if you’re not looking for financing immediately, it’s still wise to build business credit fast for when you eventually need loans and credit facilities.

Improves relationship with vendors and suppliers

Virtually all businesses need vendors and suppliers. Because of their trade credits, they play a big part in ensuring that the business maintains a good cash flow. This is especially the case if you have a good relationship with your vendors and suppliers. They’ll often give you the option to buy now and pay later, thus giving your cash flow a breather whenever necessary. This is known as a trade credit.

Just like lenders, suppliers and vendors will rarely extend trade credits if your company has a bad credit history. It implies that you have a less-than-decent track record when it comes to paying bills, which in itself can strain your relationship with suppliers.

On the other hand, a good business credit score suggests that you are diligent in paying back financial obligations on time. This encourages suppliers and vendors to give you trade credits. Not only do trade credits help your cash flow, but they also boost your business credit score.

Protects your personal credit

With good business credit, your company can qualify for loans with its business credit rating and EIN rather than your own personal credit score and SSN. Thus, when lenders and suppliers report financial activities, they’ll report to business credit bureaus and not consumer credit bureaus. This protects your personal credit from being affected in case of negative business activities.

Additionally, separating business credit from personal credit eliminates the need for a personal guarantee. The effect is that you get limited liability on your assets. Creditors won’t seize your personal property should you fail to pay your business loans.

It’s worth mentioning that only established companies are able to get loans using business credit scores. If you’ve just opened up shop or haven’t had enough time to build business credit, chances are every lender will ask for a personal guarantee. And that may damage your credit score if you’re not diligent enough in managing business debt.

Click here for more information on how to build business credit without using personal credit.

How long does it take to build business credit?

Experts say that it takes a minimum of three years to build business credit, but it’s not uncommon for some lenders to require just one year in business. Within that time, all the financial activities that are tied to your company will become a part of its credit history. That includes opening a business bank account, taking up loans, getting lines of credit, acquiring credit cards, paying suppliers, and so on. All that information is reported to business credit reporting agencies.

The three main business credit reporting agencies are Experian, Equifax, and Dun & Bradstreet (D&B). Each of these bureaus collect financial information about your company and use it to generate a credit score. Their business credit scores range from 0 to 100.

The higher the score, the more diligent a company is in managing its debts. Thus, if your business credit score is in the 80s, it means that you pay your debts before their due date. On the other hand, a low score means that your business struggles to make timely payments.

In addition to the aforementioned business credit bureaus, FICO also has its own scoring system that’s strictly for businesses – known as FICO SBSS. It ranges from 0 to 300. The higher the score, the more diligent the business is in managing credit. Most lenders who use FICO SBSS prefer a credit score of at least 140. As previously mentioned, your business is likely to pre-qualify for SBA loans with a FICO SBSS score of 140. So, that’s the magic number to aim for when building business credit.

How to build business credit fast

Your business credit score is a function of three things: credit, demographic information, and public records. Credit includes information such as credit history, payment history, credit utilization, balances, and credit mix. Demographic information includes your company’s years in business, size, and industry risk. Finally, the public records that business credit bureaus collect include bankruptcies, liens, and judgements.

As you would expect, credit plays the biggest role when building a business credit score. Thus, the manner in which you handle business finances is paramount to a good credit score. This includes proper management of your checking account, credit accounts, loans, and trade lines.

Actions like paying debts on time (or before their due date), mixing the types of credit that your business uses, and not maximizing your credit limits will greatly help when you’re trying to build credit fast. Here's a detailed look at the steps to take to build business credit.

Incorporate your business

If you want to establish credit for your new business, the first step is incorporation. While a sole proprietorship is easy to set up, it doesn’t provide a legal or structural distinction between you and the business. Lenders will always ask you to provide a personal guarantee and your Social Security Number for all financial obligations. As a result, the financial activities of your business will reflect on your personal credit score.

That’s what you want to avoid. Instead, you want your business to be its own separate entity from you, ensuring that all its financial activities will reflect on the business credit file, not your personal credit. Provided it is positive activity, it will build the business credit score.

So, what does incorporating a business mean? It basically means choosing a business structure that is either:

  • A limited liability company (LLC)
  • A limited liability partnership (LLP)
  • An S-corporation (S-corp)
  • A C-corporation (C-corp)

The two business structures to avoid are sole proprietorship and partnership. Those two won’t distinguish you, the business owner, from your business, and that may affect your ability to build business credit.

During incorporation, remember to establish a dedicated business phone number and address. It may seem simple, but a separate communication line will put that extra distance between you as a person and your business as an independent entity.

Get a dedicated business bank account

Every business, regardless of size, needs a dedicated checking account using its legal business name and EIN. This serves to establish the company as a separate and independent entity from yourself as an individual. Once you’ve created that distinction, you’ll find it easier to build business credit fast without impacting your personal credit score or personal finances.

Equally important, a dedicated business checking account keeps all your business transactions in one place. This doesn’t just simplify your work when tax time comes around, but it also makes it easier for business credit bureaus to collect accurate information about your cash flow.

These reporting agencies often track the inflow and outflow of money in your business and use that data to create a business credit report. The last thing you want is personal finances finding their way to the business checking account and impacting your business credit score.

Here’s a detailed guide on why and how to separate business and personal finances.

Simply having a business checking account is not enough to build business credit fast. You also need to keep the account active by using it. Things like making purchases, paying bills and receiving payments through the business checking account can greatly contribute to your business credit history and credit score.

Besides, opening a business checking account opens doors for good credit accounts. Lenders generally prefer borrowers who have dedicated business accounts that have been established for a few years.

Apply for an EIN for your business

An Employer Identification Number (EIN) is a unique, nine-digit number that the IRS issues to businesses for identification purposes. Just as individuals have Social Security Numbers, businesses have Employer Identification Numbers.

Sole proprietorships, partnerships and single-member LLCs that don’t have employees are not legally required to have an EIN. However, you’ll benefit more from having it, even if your business structure is exempt.

For one, an EIN establishes your company’s credit. When applying for loans and credit facilities, lenders will often require a business EIN and/or your Social Security Number (SSN). If you only have an SSN, then you’ll essentially tie that loan to your personal credit because personal credit is linked to SSN. Business credit, on the other hand, is tied to the company’s EIN. Therefore, replacing your SSN with an EIN redirects all activities related to the loan to your company’s credit report.

Besides, an EIN establishes the company as an entity independent of your Social Security Number. This separation is important when you need to build business credit fast without impacting personal credit.

Make timely payments

One of the most effective ways to build business credit fast is staying current on all your bills. This includes payments for loans, credit cards, lines of credit, lease agreements, rent, and trade lines from vendors. Oftentimes lenders and vendors will report your payment habits to business credit bureaus like Dun & Bradstreet (D&B), Experian, Equifax and FICO SBSS.

Missing payments or defaulting on credit facilities will greatly harm your business credit score. Set reminders, if you have to, that will notify you when a billing cycle comes around. Better yet, try to pay bills at least 30 days before their due date. According to D&B, consistently paying business debts 30 days sooner pushes your business credit score to the 80-100 bracket, which is considered good.

Get a DUNS number for your business

Dun & Bradstreet (D&B) is the most well-known business credit bureau. Their PayDex score is the most used by lenders and vendors when examining business credit history. Therefore, if you want to start building business credit, it makes a lot of sense to open a credit file with D&B.

Once you do that, the agency will issue your company with a unique identification number known as a Data Universal Number System (DUNS) number. Among other things, the nine-digit number identifies your business’s credit file. Lenders and vendors will use it to report your credit activity. This can help boost your credit report, provided it’s positive activity.

A DUNS number is completely free, but it takes 30 days (from the day of application) to receive.

Utilize business lines of credit and business credit cards

Business credit cards and lines of credit are exceptionally helpful when you want to build credit fast. They avail revolving credit that your company can utilize and repay to boost its credit score.

Much like loans, lines of credit and business cards build credit when you repay them on time. However, make sure not to over utilize the credit allocated to your company because that may hurt the credit score. Ideally, you’ll want to aim for 30% credit utilization or less.

That means if, for example, the combined limit of your line of credit and credit card is $100,000, make sure that you don’t spend more than $30,000 of it. In addition to lowering your business credit score, over utilizing credit may result in larger monthly payments and higher interest rates. Both of those factors won’t do any good to your business cash flow.

Establish trade lines with vendors

As is the case with your personal credit score, you’ll build business credit fast if you use a credit mix. Alongside loans, credit cards and lines of credit, consider establishing trade lines with vendors to increase the variety of your credit sources.

A vendor trade line is basically where a supplier delivers goods or services to your company and then you pay them at a later pre-agreed date. The most common tradelines are NET 30. This means that you have to pay the invoice within 30 days of delivery.

Whatever the agreement, trade lines are similar to loans and other credit facilities. When you pay the vendor on time, it will reflect positively on your business credit report. Even better, pay earlier than the due date for your business credit score to rise faster.

One thing to keep in mind is that not all vendors report to business credit bureaus. If you’re using tradelines to build business credit, you’ll want to ensure that the lenders you engage with actually report to business credit agencies.

Frequently check your business credit report

Up to 34% of all credit reports contain at least one error. You’ll want to frequently pull your company’s credit reports from all the four major business credit bureaus (Dan & Bradstreet, Equifax, Experian, and FICO SBSS) and check them for errors that may affect your business credit score.

They may seem slight, but errors can have a huge impact on a business credit report. That’s why it’s recommended that you check your business credit report at least once every six months. Should you spot any mistakes, contact the credit bureau immediately.

When to apply for a business credit card

With diligent credit management, you can build your credit score enough to increase your chances of getting approved for a good business credit card. Ideally, you’ll want to apply for the credit card after a year of good credit building. At that point business credit bureaus will have a decent amount of activity to use when evaluating your credit file.

There’s every possibility that credit card companies will reference your personal credit as well before approving your business credit card. Therefore, make sure to also make deliberate efforts to boost your personal credit score. If you’re behind on some personal loan or bill payments, make sure to catch up on them, and then wait until you have a full year of near-perfect or perfect credit before you apply for a business credit card.

With a good business and personal credit score, you can get your hands on a very affordable credit card that comes with a lower interest rate and minimal fees. Granted, the limit may be low. But over time, and with good credit behavior, the lender will increase your business credit card limit upwards.

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