Business credit: What it is and how to build it

Establishing and building your business credit may help you unlock better opportunities for your business. Without it, your financing, insurance and partnership options may be less than ideal. In this article, you'll learn how business credit works, why it's important, and how to establish and grow it. If you're a new business owner and unsure where to begin, this article will explain everything there is to know about business credit and how to build it for your new business.

Business credit scores represent your business's financial health, and a good credit rating may help establish your financial reliability with lenders and other entities.

How does business credit work?

Business credit is an outward sign of how likely your business is to borrow money or obtain goods or services and pay for them later. Business credit is often expressed as a numerical score that varies by the model used by reporting agencies, also known as credit bureaus.

Your business credit score or rating may affect your eligibility, terms and pricing for products and services. Entities you want to work with may check your business credit score to evaluate your financial responsibility and risk level, with better scores often leading to better deals. Any legally established business may build business credit, but like individual credit, it takes time.

When you do business with entities that report your accounts to business credit bureaus, that information may help generate and influence your business credit score. Your score should fluctuate as your accounts or financial situations change. Reducing your total credit usage and making timely payments may build positive business credit.

Why is business credit important?

Any credible institution can check your business credit, and agencies aren't required to notify you when they do. Establishing good credit for your business may keep you from wondering if your credit is holding your business back. Lenders, insurers, suppliers and vendors may check your credit to determine whether you could be a risky client.

What is business credit used for?

Business credit usually impacts many aspects of your business, including:

• Professional partnerships: Organizations usually don't engage in financially risky partnerships. They may check your business's credit to help determine your financial risk level.
• Investor relationships: Not having good business credit may deter potential investors. Current investors may be more likely to limit or withdraw their investments if you develop poor business credit, which could reduce your business's capital and stock value.
• Financing eligibility: The U.S. Small Business Association (SBA) reports that 20% of small business loans are denied due to poor business credit. If you secure financing, it could be for a lower amount, higher interest rate or less favorable terms.
• Insurance costs: Insurers may check your business credit when determining your rates. Poor credit may lead to higher premiums.
• Supplier and vendor contracts: Suppliers and vendors want to work with reliable clients. Having poor or no business credit may affect how quickly you have to pay invoices, how long you're contracted with them and how strict contract terms are.

How does my personal credit indirectly affect my business credit? 

Financial partners may make decisions about investing in a company based on the business owner's personal credit. For example, Capital One factors in a business owner's personal credit score when reviewing a business credit card application. However, if you aren't able to get a business credit card because your personal score is too low, it may take longer to establish a good business credit score. 

There is no fast, easy way to build business credit. The average business needs 12 to 18 months to build and improve its credit score. This is especially true for new businesses. However, the financial benefits of positive credit are worth it. Once you've established your credit, smart financial management should help you maintain it. Here are several steps to establish and grow your business credit.

1. Check your credit

There are several business credit bureaus that may have unique information and scores for your business, including Dun & Bradstreet, Experian® and Equifax®. You can order your credit information from each bureau's website, but keep in mind that there's usually a fee involved in checking your business's credit report.

2. Establish your business credit

To establish business credit, you should register your business with your state (and the state you operate in, if different). If you have an LLC or S Corporation, you might have already done this. If you're a sole proprietor or independent contractor, consider filing a doing business as (DBA) name with your state. Registering your business should help keep your business and personal information separate, and the information may be needed to establish your credit profile.

A new business should also get two identifying numbers: an employer identification number (EIN) and a D-U-N-S® number. An EIN is like a Social Security number for your business that's issued by the IRS. A D-U-N-S number is your identifier for Dun & Bradstreet. These identifiers should ensure your business is recognized by credit bureaus so you may begin building business credit.

You should also establish a professional presence with a business email and phone number. Consider creating and using a business address, even if it's a post office box. This information may be visible to entities that check your business credit, and a professional presence may boost how they perceive you.

3. Get a business credit card

Business credit cards may offer benefits like cash back or travel rewards, saving you money. Cards that report to business credit bureaus should also help establish and build your business's credit. Card issuers may use personal credit information when determining eligibility, so new businesses can use a business credit card to begin establishing business credit, even if they don't have an existing business credit score.

Capital One Spark Business cards make application decisions based on personal credit scores rather than business credit scores. Spark Business cards also report to business credit bureaus and offer travel and cash back rewards, security features, flexible payments, and a range of other business-grade expense management, cash flow management and reporting capabilities. Learn about the benefits that come with a Spark Business card and see if one is right for you.

4. Build your payment history with vendors that report to the business credit bureaus

Entities may use your payment history to assess how likely you are to pay balances on time. Because of this, working with vendors that report your accounts to the business credit bureaus may help build your business credit. It also diversifies the types of accounts on your business's credit report, providing more information for entities to base their decisions on.

Not all vendors report your accounts to business credit bureaus. If vendors you currently use don't report, consider asking them to. Ideally, you should have at least two accounts that report to business credit bureaus.

5. Pay on time (or early)

Payment history is the most significant business credit influencer. Many business credit bureaus use a system called Days Beyond Terms (DBT), which records late payments. Late payments are expressed numerically according to how late they were. For example, paying a week late would show as seven DBT.

Dun & Bradstreet uses its own PAYDEX score instead. It ranges from 0 to 100, with high numbers representing a greater chance you'll pay on time. To get a score higher than 80, you should pay your bills early. Making timely payments should help establish your fiscal responsibility and reduce your perceived risk level by improving your business credit.

6. Monitor your credit

Consider checking your credit reports from multiple business credit bureaus a few times a year. This allows you to track your progress and detect errors on reports. Because business credit is not tied to a Social Security number, there is a higher incidence of errors on business credit reports compared to that on personal credit reports. Errors may indicate fraudulent activity and may negatively impact your score. If you find an error on a report, you should report it to the issuing credit bureau to attempt to have it removed.

Take the first step in building your business credit by learning more about Capital One Spark Business cards to see if any are right for you. To explore all of our business financing options, check out Capital One's small business loans and lines of credit. Our Business Resources page may also prove valuable in optimizing your business's finances.