Business Credit: What Is It And How To Build It

Introduction

Just like individuals have personal credit scores that determine their borrowing power, businesses also have credit scores that reflect their ability to meet financial obligations. A strong business credit profile can unlock better financing options and create more opportunities for partnerships.

Wondering how business credit works or how to build business credit? In this blog, we’ll explore practical steps to do that. Let’s dive in.

What Is Business Credit?

Business credit is a financial profile that shows a company’s ability to borrow and repay debts. It’s separate from personal credit and is used by lenders, suppliers, and other creditors to assess the financial health and risk of the business before extending credit or loans.

For example, imagine a small business that wants to purchase inventory on credit. If the business has a strong credit profile, suppliers are more likely to offer favorable payment terms, such as 30 days to pay after delivery. A weaker business credit profile could result in stricter terms or higher interest rates.

Why Is It Important to Establish Business Credit?

Establishing business credit is crucial for the long-term success of your company. Think of it as building a financial reputation for your business. A company with strong business credit becomes more attractive to lenders, suppliers, and potential partners. Let’s explore why it matters:

1. Access to better financing options

Good business credit opens the door to more financing opportunities. Companies with solid credit are more likely to be approved for loans and credit lines. Moreover, they often secure these with better terms, such as lower interest rates and higher borrowing limits. For example, a business with strong credit may qualify for interest rates that are 1.5% to 3% lower than those with poor credit, saving thousands of dollars over time.

2. Separate personal and business finances

Establishing business credit allows you to separate personal and business finances, simplifying accounting and reducing personal liability. Without business credit, your personal assets could be at risk if your company defaults on a loan, as you may be held personally responsible for the debt.

3. Builds trust with suppliers and partners

Suppliers and partners often review your business credit before agreeing to extend payment terms or collaborate on larger projects. A strong credit profile signals that your company is reliable and financially stable, which can lead to better payment terms or larger contracts. It’s like showing your track record before starting a partnership—companies feel more secure when they know you can meet financial obligations.

4. Improves negotiating power

A solid business credit score gives you more negotiating power with lenders and suppliers. Strong credit can lead to more flexible terms, such as longer repayment periods or reduced fees. This helps with cash flow management and reduces the cost of doing business.

5. Attracts investors

If you want to expand or scale up, investors will want to see that your business is financially sound. A good credit score guarantees that your company has a solid foundation and is less risky. Businesses with high credit scores often attract better investment deals, enabling faster growth.

6 Steps to Build Business Credit

Now that you know why building business credit is crucial, let’s look at how to do that.

1. Establish your business as a separate entity

The first step is to separate your business from yourself legally. You’ll need to register your company as a limited liability company (LLC) or corporation. This is like giving your business its identity, making it eligible to build credit independent of your finances. Obtain an Employer Identification Number (EIN) from the IRS—it’s essentially your business’s version of a Social Security Number.

2. Open a business bank account

After setting up your business legally, open a dedicated business bank account. This helps separate your business transactions from personal ones, making it easier to track your cash flow. Consistent deposits and well-managed funds in this account build a positive financial history, which is crucial for creditworthiness.

3. Get a business credit card

Apply for a business credit card to start establishing credit. Use it for regular business expenses like office supplies or travel, and make sure to pay off the balance on time each month. This is like planting the seeds for your business credit—the more responsibly you use it, the stronger it grows.

4. Work with vendors who report payments

Not all vendors report your payment history to Credit Bureaus. Be selective and work with suppliers who do reports, as timely payments can improve your credit score. Consistently paying on time demonstrates that your business is reliable. Think of it like earning positive marks on a report card—these payments reflect your financial trustworthiness.

5. Apply for a business line of credit or loan

Once you’ve built a foundation, consider applying for a small business loan or line of credit. Even if you don’t need a large sum, responsibly managing a small loan will further establish your business credit. Just make sure you don’t borrow more than you can repay.

6. Monitor your business credit reports

Lastly, regularly check your business credit reports from agencies like Dun & Bradstreet, Experian, and Equifax. Monitoring these reports helps you catch errors or signs of fraud early on. Keeping track of your score is like maintaining a good health checkup for your business—you’ll know where you stand and what needs improvement. Additionally, integrating with Credit Management Software can help you manage all your credit-related things efficiently.

How to Maintain Business Credit History

Building business credit is just the first step; maintaining it is just as important. Just like you nurture a plant to keep it healthy, your business credit requires regular attention. Here are some ways to keep your credit in good shape:

1. Pay bills on time

Timely payments are the cornerstone of maintaining strong business credit. Late payments can negatively impact your score, much like missing a deadline affects your reputation. Always aim to pay invoices, credit card bills, and loans on or before the due date. Consider setting up automatic payments or calendar reminders to ensure consistency.

2. Keep credit utilization low

Credit utilization refers to how much of your available credit you are using. Try to keep it below 30% of your total limit. For instance, if your business credit card has a $10,000 limit, aim to keep your balance under $3,000. This shows lenders that your business can manage credit responsibly without relying too heavily on it.

3. Avoid taking on excessive debt

While using credit to build your score is important, avoid borrowing more than your business can afford to repay. Excessive debt can hurt your credit profile and put a strain on your cash flow. Think of debt as fuel—you need just enough to keep things running, but too much can overheat the system.

4. Regularly review your business credit reports

Just as you check your personal credit, it’s wise to monitor your business credit reports regularly. Errors or fraudulent activities can harm your credit score, so catching them early is crucial. If you spot any inaccuracies, contact the reporting agency to correct them immediately.

5. Update business information with credit bureaus

Ensure your business information is accurate and up to date with credit reporting agencies. Incorrect details, such as an old business address or outdated contact information, can lead to confusion and potentially impact your creditworthiness.

6. Maintain good relationships with vendors and lenders

Your relationships with suppliers and lenders play a role in your credit health. A history of positive transactions can encourage suppliers to give you better payment terms, which in turn helps with your cash flow and credit standing.

How HighRadius Can Help

HighRadius offers a comprehensive, cloud-based solution to automate and streamline businesses with Order to Cash (O2C) Software. Our solution aims to boost the efficiency of your team with our end-to-end solution, including Collections Management, Cash Application, Deductions Management, Electronic Invoicing, Payment Gateway, Surcharge Management, Interchange Fee Optimizer, Credit Cloud, & dotOne Analytics. 

Trusted by 1000+ companies to deliver speed-to-value, including P&G, Ferrero, Johnson & Johnson, and Danone, HighRadius has been a Gartner Magic Quadrant Leader 3 years in a row, placed highest in the ability to execute and furthest in the completeness of vision.

FreedaGPT, a Gen AI assistant integrated with LiveCube, a spreadsheet-like tool, helps manage data, analyze information, and generate insightful reports—all using simple, plain English commands.

HighRadius’ AI-based Credit Management Softwareprovides real-time credit visibility and global portfolio management, reducing bad debt by 20% and improving credit application approval time by 90%.

FAQs

1. What is the fastest way to build business credit?

The quickest way to build business credit is by registering your business, opening a business bank account, and getting a business credit card. Make regular, timely payments and work with vendors who report to credit bureaus to grow your score faster.

2. What is the business credit score when you first start?

When starting out, your business doesn’t have a credit score. You’ll need to establish business accounts and start making payments. As soon as credit bureaus gather enough data, usually after a few months, your business credit score will appear.

3. What is a good DUNS number?

A DUNS Number is a unique identifier for businesses issued by Dun & Bradstreet. It helps establish your business credit profile. The number itself doesn’t have a score, but having one improves your company’s credibility with lenders and vendors.