The Ultimate Business Owner's Guide to Credit Optimization

Business.com / Financial Solutions / Last Modified: February 22, 2017

Similar to personal credit score, business credit scores help lenders evaluate a company’s ability to pay bill bills on time.

While similar in theory to a personal credit score, there are some differences between a personal and business credit score.

For example, business credit scores range from 0 to 100. A score of 100 is best, as it shows you are low risk. Conversely, a score of 0 means you have a high risk as a borrower.

Your score is based on a variety of factors, including:

  • Outstanding balances
  • History
  • Payment habits
  • Credit utilization
  • Demographics, such as business size
  • Trends over a particular period of time

When you have a high personal credit score, it improves your chance of being approved for a loan with the lowest rate. This holds true with a high business credit score as well.

credit card

With all this in mind, you may not know the first thing about establishing business credit. It may sound complicated. It may even appear to be an enormous challenge. Fortunately, there are some simple steps you can take to get started.

1. Incorporate Your Business

When you do business as a sole proprietor or partnership, you are not in position to establish business credit. You can fix this easily enough by incorporating or forming an LLC.

By making this move, you can separate your personal credit from your business, thus putting you in position to start fresh.

Related Article: To LLC or Not to LLC?

2. Obtain an Employer Identification Number

Also known as an EIN, this is more or less a social security number for your business. You will use it on everything from tax returns to bank accounts.

Your personal credit is attached to your social security number. Your business credit is attached to your EIN. This is why you need to apply for an employer identification number through the IRS.

3. Open a Business Bank Account

Wait until you incorporate or form an LLC to do this. Once you have an EIN, you can visit the bank of your choice to open an account in your company’s name.

Tip: once you open a business account, you will never again have the need to use your personal accounts for business purposes.  

4. Open a Business Credit File

You can’t expect the credit reporting agencies to find you. Instead, you need to make it known that you have a business.

Here are three business credit reporting agencies to start with:

  • Equifax
  • Experian
  • Dun & Bradstreet

equifax screenshot

Image via Equifax

Tip: contact all three reporting agencies, not just one.

5. Take Steps Toward Building Your Credit

You have an EIN. You have a bank account. You have contacted three business credit reporting agencies. In other words, you are all setup and ready to go. This is when you need to formulate a plan for slowly building your credit.

Some of the best ways to do so include:

  • Open a business credit card
  • Establish a line of credit with your bank, a supplier, or a vendor
  • Pay all your bills on time, such as those for utilities and rent.

There is nothing difficult about taking these steps. In fact, most companies find that they are able to do all three of the above with relative ease.

Related Article: Business Credit Secrets: What You Don't Know Can Hurt You

Is Good Credit Really That Important?

When you apply for business financing, a higher credit score will work in your favor in three ways:

  • Better chance of approval
  • Lower interest rate
  • Approval to borrow more money

With nonexistent or poor business credit, you will be fighting an uphill battle. While you may find a lender that is willing to do business with you, the cost will be much greater.

What Will You Do Next?

It doesn’t matter if your business is a few days old or a few years old, it is important to focus on the finer details of credit optimization.

If you aren’t sure of what you are doing, if you continue to go down the wrong path, you may be hurting your business credit without realizing what you are doing.

As long as you understand the importance of business credit optimization, including how to get started and the best practices for establishing a solid score, you are on the right path. It may not seem like a big deal right now, but an excellent business credit score can work in your favor in many ways.

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