The Essential Timeline For Improving Business Credit

by QuickBooks

5 min read

It’s important for small business owners to have good personal credit and a strong business credit profile. In this article, we will tell you why business credit matters. We’ll also tell you what you need to do today, in the coming months and on an ongoing basis to improve your business’ credit score.

Why Business Credit Matters

Strong business credit lays the foundation for a thriving small business. It leads to:

  • Better terms with lenders and suppliers. Creditworthy businesses are more likely to qualify for business financing and are also usually approved for larger amounts of financing, lower interest rates and more favorable payment terms from suppliers.
  • Less reliance on your personal credit. You can qualify for credit based strictly on a strong business credit profile, without checks on your personal credit. By separating personal and business credit, you protect your personal finances if your business doesn’t succeed or grow as expected.

Now that you know why it’s important, let’s review steps to improve it.

How to Improve Business Credit

Today: Access Your Business and Personal Credit Reports

Before you can improve business credit, you should find out where you currently stand with the main business credit bureaus: Dun & Bradstreet (D&B), Experian and Equifax. You can get a summary of your business credit score on Creditera, and full reports for a fee.

Business credit scores differ from consumer credit scores because each business credit bureau tracks different data and has different scoring models. D&B reports will show your payment history with suppliers (trade data). In addition to trade data, Experian and Equifax also track business loan payments.

The most popular business credit score is D&B’s Paydex, which ranges from 0-100. Anything above 80 is generally considered a good Paydex score. Experian has a similar 0-100 scoring range, with anything above 80 being considered a good score. Equifax’s score ranges from 100-992, with 992 being the best score.

Next, assess your personal credit report. Most business lenders consider both your business credit score and your personal credit score in determining your eligibility for a loan. Creditera gives you access to personal and business credit reports in one place. If you find an error on your personal credit report, get it fixed by filing a dispute with the credit agency.

If you forego Creditera for your personal credit history, you can get one free report every year from the personal credit bureaus: Experian, Equifax and TransUnion.

Week 1: Build Business Credit

Open a business credit file if you don’t have one already. If your business could not be scored or didn’t have a report, then establishing a business credit file is the first step you need to take to build business credit.

You can begin by getting a D-U-N-S number, a 9-digit number issued by Dun & Bradstreet used to identify your business. A D-U-N-S number, which is available for free on D&B’s website, lets suppliers, contractors and others you do business with verify that your business exists and is operational.

Next, you’ll need at least three trade references to report your payment history to the business credit bureaus. I suggest choosing vendors with the following characteristics as trade references:

  • You have had an open account with the vendor for at least 3 months
  • You have a high credit limit with the vendor
  • You’ve had no late payments with the vendor

If your suppliers don’t report to business credit bureaus, consider switching to suppliers that do, as trade data makes up the bulk of your business credit score.

Next, if you don’t already have one, apply for an employer identification number (EIN). An EIN is an IRS-issued tax identification number for your business. With an EIN, you can apply for business financing and open business accounts without providing your social security number. Even though vendors and suppliers may still check your personal credit, establishing business accounts and loans under the business’ name and EIN improves business credit.

Week 2: Build More Business Credit

Continue your credit-building momentum by opening a business checking account. Opening a separate business checking account improves business credit by separating your business finances from your personal funds. Make sure you pay vendors and make business loan payments from your business checking account. If you have a business credit card, use this account to pay your monthly balance.

Speaking of business credit cards, use them if you have them. Getting a business credit card—including a retail card from places like Staples or Home Depot—and making timely payments on it helps you build up a history of prompt payments and improves your business credit. As an added bonus, you can earn cashback and rewards points by using a business credit card.

Next Month: Long-Term Considerations

Think about your business structure. If you’re a sole proprietorship, I recommend consulting an accountant and lawyer within the next month about the benefits of choosing a different business structure. While there are a lot of factors that go into which business structure you should choose, there are good reasons to organize as a limited liability company (LLC) or corporation.

As a sole proprietor, lenders will not give you a business loan without requiring a personal guarantee and checking on your personal credit. Additionally, sole proprietors are personally liable for the business’ debts and obligations. Organizing as an LLC or corporation shields you personally from business debts and obligations. It also facilitates separation between business credit and personal credit.

Ongoing Basis: Maintain Business Credit

Once you’ve taken the above steps to build up your business credit, you’re in maintenance mode.

Regularly review your business and personal credit reports. Having an account with a credit monitoring platform, such as Creditera, helps you keep tabs on your business and personal credit from month to month. If any errors show up on your reports, you can dispute them and get them fixed right away. Or if some part of your credit history, such as trade data, is sparse, then you can take steps to build up your credit specifically in that area.

And it won’t hurt to familiarize yourself with the different components of your business credit report, so you can work on the specific factors that are bringing down your score.

Just as with your personal finances, pay your business’ bills on time or early. Payment history is the main factor used to calculate your business credit score. The best way to keep up your business credit score over time is to pay every one of your suppliers and creditors on time, or better yet, early.

Follow the guidelines above, and you’ll be on your way to improving your business credit in no time!

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