Establishing and Building Business Credit as a New Owner

The cost to start a small business can be significant — only four percent of respondents in a recent survey said they spent less than $50,000, while 27% paid $50,001 to $175,00.1 Seventy-one percent paid $175,001 to $1 million, and 13% paid more than $1 million.2

These expenses can be crippling, especially for younger firms. According to the Federal Reserve, 35% of firms operating less than five years used personal assets to finance business expenses.3 The statistics make sense when you consider that most new owners don’t have a business credit history.

A business credit history demonstrates financial stability.

Banks and credit card issuers have lending requirements and review a borrower's credit history to make decisions. So, using savings or a personal credit card is usually just easier. However, it’s wise to build business credit history, which often helps secure better loan terms, including lower interest rates. Credit is an essential part of obtaining funds like startup loans for limited liability companies (LLCs), partnerships and other small business types. These startup loans give companies the capital they need to cover initial equipment, inventory and marketing expenses.

Clients like government agencies and financial institutions may also require vendors to have an established credit history. Organizations of this type tend to select partners with a strong business credit score, which suggests the company is financially stable and will be able to consistently provide the products or services needed.

Insurance companies often factor in business credit scores as well. The scores help them assess your business’s financial wellness and the risk they are assuming if they insure you. It’s also used to determine the premiums you’ll pay.

Building business credit isn’t as complicated as it might seem.

Establishing business credit takes time but isn’t as hard as you might think. Using multiple payment methods — such as credit cards, business cards and tradelines — is a means to quickly establish credit, as well as paying bills on time. These steps will help you get off to a good start.

Legally establish your business.

Businesses must establish themselves legally before applying for credit. This process involves choosing a legal structure and registering the business under the chosen name. Then, business owners will need to get federal and state tax IDs. An Employer Identification Number (EIN) is vital for many parts of the business, including applying for business credit cards. 

Request a D-U-N-S® number.

Dun & Bradstreet (D&B) designed the Data Universal Numbering System (DUNS) to provide businesses with unique, nine-digit identifying numbers — much like a personal Social Security Number (SSN). You can enter the following information on the company’s site to receive a D-U-N-S number free of charge.

• Legal business name
• Owner name, partner and/or senior leadership
• Business location – file separately for each site
• Phone number
• Year of creation
• Primary industry
• Legal structure
• Number of employees

Business credit reporting can be inconsistent. Before applying, ask whether the lender will report your account to one of the credit bureaus.

Apply for a business credit card.

After legally establishing the business, you can apply for a business credit card. Businesses can use their EIN for business credit solutions like credit cards, though most business cards will also require additional information like Social Security Number, company name, address, bank account details and a personal guarantee. You can get business credit without a personal guarantee when you have a strong credit score and substantial assets. 

You will have a “thin” credit file until you open an account that is reported to at least one of the three business credit bureaus — D&B, Equifax Business and Experian Business. Applying for and using a business credit card or secured card will help to establish business credit. Many small business types can get a business credit card, including LLCs and sole proprietors. 

Consider getting a credit card through a store you will often frequent during the initial startup process or use for ongoing business needs. For example, a Home Depot credit card for business use can help build credit while offering access to deals on essential materials. Other beneficial credit card types may include Amazon business, office supply store or restaurant supply store cards. 

Initially, you may only qualify for a low limit. However, if you pay bills on time, you may be eligible for a future limit increase. All business credit card issuers don’t report to the three credit bureaus, so ask before you apply.

Build your business credit score with trade credit.

Some companies, like Uline, Quill and Home Depot, offer “net 30," “net 60,” or “net 90” lines of credit for small businesses to purchase office supplies, safety equipment and other business essentials. Net 30 accounts mean businesses repay the costs of goods or services within 30 days. Net 60 and net 90 allow repayment within 60 or 90 days, respectively.

These business tradeline options are beneficial because the vendors report payments to the credit bureaus. Within a few months, you’ll begin to build business credit through a positive vendor credit account balance. Making early payments on trade credit can further boost your credit score.

You can also submit vendors and suppliers with whom you have a positive payment history to D&B as trade references. The D&B team can also use the payment records to calculate a PAYDEX® score. This proprietary, dollar-weighted performance indicator ranges from one to 100. Higher scores indicate D&B's confidence in a business's likelihood of paying bills on time. 

Like a credit score, the PAYDEX score helps lenders, suppliers and partners assess risk. A higher score can earn you better financing and lower interest. You can also get better terms on future trade credit. 

Apply for a business line of credit or loans.

A business line of credit is like a credit card, but is used to access cash rather than purchasing goods and services. You can use a line of credit to buy inventory, compensate employees or cover shortages while waiting for customer payments. Without an established credit history, you might be unable to qualify for a stand-alone line of credit. It’s a good idea to meet with a banker at the financial institution where you maintain business or personal checking accounts.

Besides a line of credit, businesses can apply for loans, including options like equipment financing and leasing. Timely loan payments increase business credit over time. 

Pay utilities and other bills on time to build credit.

Utility and wireless payments don’t typically appear on credit reports. However, services like eCredable help businesses and individuals report these payments to the credit bureaus. The company offers two levels of service. When you sign up for eCredable, you can link an unlimited number of eligible accounts, including internet, mobile phones and utilities, for which the company downloads and reports payments.

Businesses can also request on-demand verification and reports for other paid monthly or quarterly expenses, such as accounting, marketing and property rentals. It’s a good option for businesses that are interested in establishing business credit without taking on debt.

Monitor your business credit.

Maintaining business credit requires ongoing effort. This work begins with checking business credit reports through the three major credit bureaus. Visit the business sections of bureau websites and enter information about the business such as company name, city and state to purchase reports. Businesses can also pay a subscription for ongoing monitoring services.  When accessing the score, check for any errors or outdated information. Businesses can also set up credit monitoring alerts for additional insight.

Carefully manage your business credit once it’s established.

There are good reasons for establishing business credit early on. For example, you may want to purchase inventory or new equipment or need to tap a line of credit to supplement cash flow during slow periods.

Always pay your bills on time and use credit responsibly. Regularly monitor your credit history and score to ensure there are no reported inaccuracies. Carefully managing your credit ensures you’ll have access to the funds your business needs in the future.

If you have questions about how to establish business credit, we can help. For more information, call 1-888-SYNOVUS (1-888-796-6887) or stop by one of our local branches.