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How to Establish Business Credit as a New Business
Many small business owners rely on their personal credit to get establishing business credit. In fact, according to the U.S. Small Business Administration, 13% of business owners use a personal credit card for startup capital, while only 7% use a business credit card.1
The disparity makes sense when you consider that most business owners have an established personal credit history, while a new business has none. Banks and credit card companies use a borrower's credit history to make lending decisions, so using a personal credit card is just easier.
However, there are some good reasons to establish your credit history as a business. Down the road, you may want to finance the purchase of new equipment or inventory, or you may need to get a line of credit to ensure cash flow during slow periods. Establishing a credit history can also help you later on if you want to work with a client (such as a government entity or a financial institution) that checks business credit scores before selecting vendors. (Clients prefer to go with vendors with a strong credit rating, because this suggests that the company will be around for the long-term — and therefore able to consistently provide them with the product or service they need.)
What's more, insurance companies may factor your business credit score into your rates.
Fortunately, building business credit history is not as complicated as you may think. Here are five steps every business owner can take to build a business credit history from scratch.
1. Apply for a DUNS number online
To start, you'll need a DUNS number. DUNS stands for Data Universal Numbering System. It's a system developed by Dun & Bradstreet (D&B) to give a unique, nine-digit identification number for businesses, much like your Social Security number is a unique identifier for individuals.
You can request a DUNS number, free of charge, by providing some basic information, including:2
- Business name
- Business location
- Phone number
If you've registered your business with your state or obtained a business license, you might already have a DUNS number, as D&B sometimes picks up on these activities. If a DUNS number already exists for your business, the website will walk you through the process of verifying your identity to claim your number.
Business credit reporting can be inconsistent. Before applying, ask whether the lender will report your account to one of the business credit bureaus.
2. Apply for a business credit card
Your credit file will be thin until you open an account that gets reported to at least one of the three business credit rating agencies: D&B, Equifax, and Experian.
One way to start building your credit history is applying for a business credit card. Initially, you may only qualify for a low limit. But if you pay your bills on time, you may be eligible for a higher limit in the future.
One caveat before you apply for a business credit card: not all business credit cards report to the credit rating agencies, so ask about reporting policies before applying.
3. Open a vendor account
Another way to establish business credit is to open a small “vendor line of credit."
Many companies, including Quill, Uline, and Grainger, allow businesses to purchase items such as office supplies, safety equipment, coffee, and snacks on credit. You'll receive your products in the mail, along with an invoice due in 15 or 30 days. Essentially, this is a small line of credit. Once you pay your bill, the vendor will report it to the credit bureaus. Within a few months, you're on your way to building a business credit score.
4. Get credit for paying your other bills
Utilities and your cell phone bills don't typically show up on your credit report (unless your account goes into collection status). However, services like eCredable can help you build business credit with the bills you're already paying.
When you sign up for an eCredable account, you link up to eight eligible accounts, including utilities, mobile phones, and internet. The system downloads your payment history from the service provider and reports your payment history to the credit bureaus.
The fee for this service is $49.95 for the first month and $9.95 per month after that. However, it's a good alternative for business owners who want to build a business credit score without running the risk of going into debt.
5. Apply for a business line of credit
A business line of credit is another option for building a business credit history. A business line of credit is like a credit card, but instead of using it to purchase goods and service, you get access to cash – usually at a lower interest rate.
You can use a line of credit to purchase inventory, cover payroll, or see you through a short-term cash shortage while waiting for clients to pay you.
Without an established business credit history, you may have trouble qualifying for a stand-alone line of credit. For that reason, it's a good idea to talk to someone at the bank where you currently maintain your business checking or any personal bank accounts.
Once you've established your business credit score, keep it healthy by paying your bills on time and using your business credit responsibly. It could be a determining factor in the long-term success of your business.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.