What is business credit and how to build it

‍What is Business Credit?

Business credit is a measure of a company's ability to borrow money and repay it on time. It is similar to personal credit but is based on the financial history of the business rather than the personal credit history of the business owner.

In short, business credit is the creditworthiness of your business entity or company.

How Business Credit works

Business credit works a lot like personal credit. Lenders, vendors, and other businesses may report payment history to business credit bureaus.

Other companies and lenders then purchase a company's credit report to help them decide whether to extend credit or do business with that company.

There are some key differences, however:

• Unlike personal credit, where most credit is reported to credit bureaus, not all companies report payment history to business credit bureaus.
• Anyone can purchase a business credit report, unlike personal credit reports, which are more tightly regulated.
• Credit limits and creditor names aren't usually reported. It can sometimes be difficult to determine which companies appear on business credit reports.

Equifax, Experian, and Dun & Bradstreet are the most common recognized sources of business credit reports.

Why is Business Credit important?

Your business can have its own business credit profile and business credit score.

A business credit profile is a characterization of your company’s credit history that determines its ability to borrow money. Your business credit score reflects your business’s creditworthiness and iaffects your access to credit products such as business credit cards and business loans.

Both your credit profile and your credit score give credit agencies, lenders, vendors and suppliers an indicator of how you manage your debt and your likelihood of paying them on time.

As mentioned, good business credit can help you qualify for business loans or financing, as well as help you secure financing with more favorable terms or lower interest rates.

A higher credit score means better terms for your business. This could be in the form of longer payment plans, more diverse financing options, or access to more money than you could get with a lower credit score.

Getting better business financing terms will save you a significant amount of money over time. In turn, these savings give you the ability to offer lower prices, reinvest in the business, or create other key competitive advantages.

How to build Business Credit

Here are seven steps you can take to build business credit.

1. Incorporate your business: Incorporating your business gives you more credibility and allows you to start building a business credit history. Here is everything you need to know to incorporate your LLC or C Corp today.
2. Obtain a Federal Tax ID Number or EIN: After incorporating, you'll receive an EIN from the IRS. This number acts as your company's tax ID, and you'll need it to apply for business loans. Click here to go through the important things you should know about obtaining an EIN.
3. Open a business bank account: This step will further separate your business finances from your personal finances. It will also streamline your accounting processes and make it easier to file business taxes. Learn all about opening a business bank account in the USA here.
4. Apply for a business credit card: Once you get a business credit card, you can start building a credit history by using it for regular business expenses. Over time, this will help improve your business credit score.
5. Pay on time: You won’t be able to build credit if you regularly miss payments. Pay on time or early if you can, and you may build your business credit score more quickly.
6. Keep your debt-to-credit ratio low: Your debt-to-credit ratio is the amount of credit you use relative to your total credit limit. For example, if you have a $6,000 balance on a credit card with a $12,000 limit, your debt-to-credit ratio is 50%. Try to keep this ratio under 40%.
7. Monitor your credit score: You should regularly review your business credit reports to understand your credit history and identify any areas where you can improve. You can also report inaccurate or outdated information and have it removed from your credit history.

Taking a proactive approach to building your business credit profile and using the right tools can pay off in better access to capital and lower interest rates.