How to Build Business Credit as a New Small Business Owner

Between institutional lenders, large and small banks, credit unions, and alternative lenders, less than a third of all small business loan applications actually get approved. This leaves the majority of business owners without the funding they need, whether they’re trying to take out a small business loan, business line of credit, or even apply for a small business credit card.

In order to qualify for business-related credit products, companies large and small need to meet certain eligibility requirements, like having a good credit score and demonstrating adequate financial health. Having a good small business credit score can not only help you get approved for financing but also lock in the best possible rates and terms. Here’s a look at how you can build small or startup business credit, the easiest business credit card to get, and ways to improve your company’s credit profile over time.

Benefits of Building Business Credit

As a small business owner, you may encounter scenarios where you need to borrow money. These funds might be used to buy equipment, purchase inventory, acquire real estate, expand your business, or even acquire another business. Without a loan and enough cash in your business bank account, you would be forced to abandon your plans. But if you have sufficient business credit, you might be able to borrow what you need from a number of different lenders and pay the funds back over time.

Some benefits of building business credit include:

• Lower interest rates. The better your business credit score, the more likely you are to get approved for funding and secure the most favorable repayment terms. You’d be surprised at how much a few basis points can save you across a 10+ year term loan.
• No need for personal guarantees or collateral. When borrowers have a low credit score, lenders will want some sort of guarantee on the loan to help mitigate risk. Many small business owners will use a personal guarantee and/or asset (such as a savings account, equipment, or even real estate) as collateral, but this can have disastrous consequences if they default on their small business loan. The better your credit, the more likely you are to get approved for unsecured loans that don’t need collateral.
• Improved liquidity. Instead of using all of your business’s cash, you can finance certain purchases to improve your cash position. This gives you a financial safety net and makes it easier to meet short-term financial obligations when they arise.

Business Credit vs. Personal Credit

While small business credit is similar in many ways to your personal credit score, there are a few important differences to note.

1. Your business credit report is attached to your Employer Identification Number (EIN) — and in the case of Dun & Bradstreet, your DUNS number — while your personal credit history is connected to your Social Security Number (SSN).
2. A personal credit score can be anywhere from 300 to 850, depending on the scoring model used. A business credit score, on the other hand, typically ranges from 0 to 100.
3. There are three primary business credit bureaus: Equifax, Experian, and Dun & Bradstreet. For consumer credit (personal) reports, the three credit bureaus are Equifax, Experian, and TransUnion.

You may be surprised to learn that your personal credit score can still impact your ability to get a small business loan. This is more likely if you have a new startup, as lenders might rely on your personal credit history due to your lack of business credit history. If you can’t qualify based on your personal credit history or business history, you may not get access to the funds you need.

How to Build Business Credit

There are five primary ways to build business credit as a new business owner. These will help you whether you try to get a business equipment loan, take out a business credit card, or qualify for a small business loan through the Small Business Administration (SBA).

1. Apply for an EIN

As mentioned earlier, your business credit is connected to your business’s EIN. In addition to borrowing, you will need one of these numbers for tax reporting purposes, changing your type of business entity, and opening a business bank account. If “your principal business is located in the United States or U.S. Territories,” you can easily apply for an EIN online through the IRS.gov website.

2. Form an LLC or Corporation

Are you currently operating as a sole proprietor? If so, you may want to form a corporation or an LLC. This will make it easier to separate your business finances and personal finances, protect your personal assets in the event of a lawsuit, and qualify for certain business loans.

3. Keep an Eye on Your Credit Reports

Let’s say you’ve done everything right to build your business credit, but your score is still low. While you may have a limited history or have made some mistakes along the way, it’s also possible that the business credit reporting agencies made a mistake.

Mistakes are uncommon but not impossible, so you should carefully review your business history regularly to see if there are any inaccuracies. If you find any mistakes, file a dispute with the business credit reporting agencies and/or reporting providers.

4. Start Using a Business Credit Card

By opening and using a business credit card that reports to the business credit bureaus, you can begin building up your business credit history – but only if you responsibly use the card. To do this, avoid missing any payments and try to keep a low credit utilization ratio. You should also try to avoid carrying over a credit card balance from one month to the next, as a double-digit annual percentage rate (APR) can be incredibly costly.

5. Get a Small Business Loan

Even with a lower business credit score, some lenders (particularly online lenders) might be willing to approve your application. And if you can get a small business loan and pay it back on time, you may be able to  boost your business credit score each month. Just be sure to ask the lender whether they report to the credit bureaus before applying for the loan.

How to Grow Your Business Without a Strong Business Credit Score

If your current creditworthiness prevents you from getting a loan from most financial institutions, but you need cash to grow your business, consider the following options.

Grow Without a Loan

While a loan or other form of borrowing is a great way to grow your business credit score, it’s not imperative. In fact, you can still grow your business without borrowing any money at all.

Use your business bank account

Do you have extra cash sitting in your business checking account? Consider using some of that money to grow your business, whether you need to purchase inventory, hire employees, buy equipment, or build out a new storefront.

You don’t want to use up all of your liquidity, though. Financial experts recommend that small business owners keep cash reserves equal to three to six months’ worth of expenses. If you have $100,000 in your business bank account and $10,000 in monthly expenses, for example, you could probably make a $40,000 purchase without putting your business at risk.

Negotiate payment terms with customers

Entrepreneurs often need small business loans because of cash flow issues. Sometimes just changing your invoicing process or adjusting net payment agreements with clients can be enough to fix those problems.

Negotiate payment terms with suppliers

The small business catch-22: You want your customers to pay you as early as possible, but you want to pay your suppliers as late as possible. Some suppliers (though not all) will be open to individual negotiations, which might allow you to make later payments and correct any cash flow issues your business has.

Reinvest profits

As a small business owner, you will likely need to take a salary to support yourself and your family. By only paying yourself enough to cover your personal expenses, you can reinvest the rest of the money back into the business to help it grow even faster.

Apply for Financing with Lower Requirements

Even if you have poor or limited business credit, financing isn’t automatically out of reach. Here are a few sources of business financing for small business owners who have bad credit or a low business credit score.

Business credit cards

Some business credit cards are only available to applicants with good business credit scores, though others that have lower eligibility requirements. No, you might not be able to get the best business credit card with the most attractive terms or highest cash back, but you can probably find a business card that offers a low or $0 annual fee and a decent credit limit for your company. Sometimes, a secured credit card might even be your best option to help build up your company’s payment history.

Once you get a small business credit card, be sure to avoid any late payments – they not only ding your business’s credit score but also result in high future payments. While a credit card can be a good option for short-term financing, it’s not in your best interests to carry over a balance into a new statement cycle, as credit cards like Visa, Mastercard, American Express, and Discover can all have high interest rates.

Invoice factoring

Invoice factoring allows small business owners to turn outstanding invoices into a lump sum of cash by selling the outstanding debt through a third-party partnership. This gives you access to cash when needed most without forcing you to wait for clients to send payment.

There are a couple of downsides, of course:

1. The factoring company buys those invoices at a discount, so you won’t get the full amount owed.
2. You are still on the hook for the invoice if you have a recourse factor.

Invoice factoring is one way to get quick cash if you’re in a difficult situation, but you shouldn’t make a habit of using it and it can be costly.

Merchant cash advance

A merchant cash advance (MCA) enables small business owners to get upfront cash in exchange for a portion of their future sales. Since your payments are based on your sales, MCAs are a solid option for business owners who have fluctuating sales – you don’t have to worry about meeting a fixed obligation. But there’s a downside to that structure: if your sales are higher than expected, you pay the merchant cash advance company faster than expected and you typically don’t get a discount for early payment. So, the effective APR for a merchant cash advance can be sky-high in certain instances. This is another financing option that should only be used when necessary.

Final Thoughts

As a small business owner, one important long-term goal for your company is to build credit. While this takes time and a dedicated effort, a good small business credit history will give you access to many types of business financing, which you can use to sustain or grow your company and even pay for unexpected expenses. The better your business credit, the better the products and terms you’ll have access to when you need them.

You can build small business credit by taking out loans, lines of credit, or business credit cards and paying them back responsibly. You may still be able to access these products with a limited credit history or poor credit, though your options will be limited and, in many cases, more costly. As your credit history and score grow, you’ll be able to qualify for some of the best credit cards for business owners and the most enviable terms.

FAQs About Small Business Credit

What’s the fastest way to build credit for my LLC?

If you want to build business credit, you first need to establish your business by obtaining an EIN. From there, you can use your existing business history or, in some cases, lean on your personal credit to take out loans, credit cards, or lines of credit. As you responsibly spend and pay down these accounts, your business credit history will grow.

What credit score does a small business start with?

If your business hasn’t utilized any credit-based products, like loans or lines of credit, you won’t yet have a business credit score. As you open accounts for your business, creditors will report your account history to the business credit bureaus and attach that history to your EIN. This will generate a business credit score based on factors like account balances, the age of the accounts, and your payment history.

Can a new LLC get a credit card?

Yes, even new businesses can qualify for company credit cards, though your options will be limited if you don’t yet have a business credit score (or your score is too low). There are many credit cards available to new companies, and you may be able to qualify based on your personal credit score, too. If you’re finding it difficult to get approved, consider a secured business credit card which doesn’t typically require a minimum business credit score.

Does my EIN have a credit score?

Business credit scores are attached to your company’s EIN, the same way that your personal credit score is attached to your Social Security number. As you open and manage credit-related accounts like loans and credit cards, your account history will be reported to the business credit bureaus, which will track this history and use it to generate your small business credit score.

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