How to Build Corporate Credit for Your Business
As a small business owner, good corporate credit can be an essential asset for your company. It’s a tool you can use to secure funds that can help grow your business, improve cash flow, and even serve as a financial reserve during a downturn or temporary setback.
We’ll explain what corporate credit is, how it works, and the process you need to go through to establish a strong corporate credit profile for your business.
What Is Corporate Credit?
Corporate credit, also known as business credit, is credit that a business can establish instead of a person. Just like an individual can have personal credit reports and credit scores, a business can have the same. If you’re a small business owner, it’s important to build good corporate credit even if you don’t plan to use it right away.
Good corporate credit can also help your company come across as stable and reliable to would-be investors, partners, lenders, vendors and more. Since business credit data is public information, working to establish a positive profile is a responsibility you really can’t afford to ignore.
Once you’ve properly set your business, it can apply for financing to create a corporate credit profile.
If your company qualifies for corporate credit accounts (i.e., small business credit card, business credit line, business loan, etc.), the lender, vendor, or financial institution may report account activity – both positive and negative – to the business credit reporting agencies each month.
When this happens, it can give your company the opportunity to create positive business credit history and build good business credit scores.
How to Build Corporate Credit
Sometimes it’s hard to know where to begin when building corporateWe’ve compiled eight steps to help guide you through your corporate credit-building journey.
1. Set up your business correctly by forming an entity with a unique business name, address, and phone number.
Before you apply for financing, it’s critical to establish your business the right way so it appears legitimate and credible in the eyes of lenders and others. If you skip or try to shortcut the business setup process, you might not be able to satisfy a lender or supplier’s verification requirements.
To legitimize your business, you’ll need to complete a number of tasks, including:
- Form a legal business entity such as a corporation, s-corporation, LLC, or partnership.
- Choose a unique business name, and then use that exact name as you establish utility accounts and in other business dealings.
- Put your business on the map with a physical address, phone number, website, and email address.
- List your business phone number with your local telephone directory.
2. Get an EIN and DUNS Number.
Once you form a legal business entity with your state, you’ll need to register with the Internal Revenue Service. The IRS requires most U.S.-based businesses to apply for an Employer Identification Number (EIN) and use it for tax reporting purposes.
You can apply for a free EIN online at the IRS website. (Note: If you’re a sole proprietor or a single-member LLC, you may not need to complete this step. Consult with a business attorney to understand your businesses’ specific requirements.)
Next, you should set up a unique identification number with Dun & Bradstreet called a DUNS Number. By setting up a nine-digit DUNS Number, you are essentially opening a credit file for your business. It’s also free to set up your DUNS Number.
Lenders and potential business partners can use your DUNS Number to access information about your company. Once you establish enough credit with Dun & Bradstreet—at least four trade references—you should qualify for a corporate credit score from D&B called the PAYDEX® score.
3. Create a separate business bank account.
After you receive your EIN number, you should be able to open a separate business bank account for your company.
Having a separate business bank account enables you to keep your personal and business finances separate. In many cases, it may also protect you from personal financial liability for your businesses’ financial outcomes and simplify your life at tax time when it’s important to keep your personal and business expenses organized!
Opening a separate business bank account can also be a critical component of establishing corporate credit. Having a dedicated business account legitimizes your company, and can make it appear more credible in the eyes of lenders, partners, vendors, and others.
4. Consider a credit builder loan.
Qualifying for your first credit accounts as a business can be tricky. Many lenders won’t be comfortable working with your company until it has at least some positive credit history established.
There are some options that can work well for business credit newcomers. A business credit builder loan is one tool that could help you establish corporate credit for the first time.
Depending on the lender, a credit builder loan could help you establish credit under your business EIN that’s completely separate from your personal credit profile.
CreditStrong offers a business credit builder loan to help you establish credit with the major business credit bureaus. Here’s how it works:
- Approved applicants receive an instant $10,000 credit builder installment account.
- CreditStrong secures the loan proceeds in a separate business savings account. You won’t be given immediate access to these funds.
- Your business makes monthly payments to Credit Strong for 25 months (just over two years).
- CreditStrong reports the account and your payment history to the major business credit bureaus.
- When you complete or close and pay off your account, you’ll receive your available principal loan amount minus any unpaid interest or fees.
Check out CreditStrong Business plans and pricing here.
5. Obtain ‘Net-30’ vendor accounts.
Vendor accounts represent another type of credit that may be easier to establish when your business is building credit from scratch.
A net-30 vendor account is a type of credit that your company may be able to access from suppliers, vendors, or service providers.
With a net-30 payment arrangement, your business receives the products or services it needs upfront. Then, the supplier or service provider sends an invoice and your business must pay within 30 days or less.
Some net-30 accounts will not help your company establish credit. But if the vendor or service provider reports the account to the business credit reporting agencies, it could help you with your credit-building goals.
Not sure where to start? Here’s a list of easy-approval net-30 accounts to consider. Can’t qualify for a net-30 account? Some vendors may ask you to start with shorter terms (for example, net-10, requiring your payment ten days after invoicing) before approving you for net-30 payment options.
6. Apply for business credit cards and loans once your business credit is more established.
A small business credit card can offer your business a number of perks, including credit building potential and another way to keep your personal and business credit separate.
As an added bonus, the right account may give you the opportunity to earn rewards from your normal business expenses.
It’s worth noting that most credit card issuers will check your personal credit report and score when you apply for a business credit card. And if you qualify for a new account, you’ll probably have to provide a personal guarantee accepting responsibility for the debt in the event your company fails to pay as agreed.
Remember that paying off your full statement balance each month is the best way to manage any type of credit card. When you develop this good habit, you can avoid expensive interest charges.
Plus, keeping the credit card utilization rate low on your credit card account—business or personal—has the potential to benefit your credit scores.
7. Always pay on time.
Paying your credit obligations on time is critical if you want to earn good credit scores as a business or as a consumer. With business credit, paying early might give your credit rating an added boost.
Payment history is typically the most important component of any credit score, and late payments have the ability to drive your credit score down in a hurry.
If you want to establish good credit for your business that you can later leverage to its advantage, on-time payment history is a must.
8. Monitor your business credit.
Monitoring your business credit reports and scores is a good habit to develop—both when establishing your corporate credit profile and beyond to maintain it. And while we’re on the subject, it’s smart to track your personal credit details too.
On the personal side, you can access free credit reports from all three consumer credit bureaus once every 12 months at AnnualCreditReport.com. This is a right the federal government affords you in the Fair Credit Reporting Act (FCRA).
Monitoring your business credit details can be a little trickier. There’s no federal mandate that requires the business credit reporting agencies to give free credit reports to businesses.
However, there are still a few ways you can access and even monitor some of your business credit information free of charge:
You can also purchase business credit reports and scores from the business credit reporting agencies. Depending on the credit bureau and the product you choose, prices can range from $39.95 for a single corporate credit report up to $1,495 per year.
What Is the Best Corporate Credit Rating?
In the consumer credit world, most credit scores range from 300-850. Although lenders may opt to use different credit brands and versions (for example, there are many versions of a FICO® score), an 850 credit score is generally the highest number you can receive (with a few exceptions in the auto lending and credit card space).
However, business credit score ranges are less uniform. Experian’s Intelliscore Plus and Dun & Bradstreet’s PAYDEX scores each max out at 100. But the FICO® SBSS Score ranges from 0 to 300.
Meanwhile, Equifax has a variety of business scores including the Equifax Business Risk Score, the Equifax Business Credit Risk Score, and the Equifax Business Failure Score. The first two (Business Risk and Business Credit Risk Scores) range from 101-992. The Business Failure Score, on the other hand, begins at 1000 and goes up to 1610.
The good news is that all of the business credit scores mentioned above have something in common. Lower credit scores indicate higher risk. So, the higher your credit score climbs on any scale, the more likely your business is to qualify for financing when it needs it.
Higher business credit scores may also help your company secure better borrowing terms, lower interest rates, and perhaps even larger amounts of funding when it comes time to explore business financing options.