What Is Business Credit?
Business credit measures a business's ability to pay bills on time and get financing. Like with personal credit, lenders pull a business credit report to determine the terms of a business loan, credit card, or line of credit.
Good business credit increases the value of a business, creating growth opportunities.
Our What Is Business Credit guide will teach you what business credit is and how to build business credit.
Recommended: Get a Tillful business credit card to build business credit for your small business.
Benefits of Building Business Credit
Building business credit is important for several reasons. One of the most important benefits of business credit is that it can help your business grow. Also, if you have good credit, businesses are more likely to want to do business with you, leading to more sales and higher profits.
More business credit benefits include:
- Keeping the company operating. A business with good business credit can withstand economic downturns far more easily than one with poor credit. That’s because it has easier access to capital and other resources. Good business credit can also keep a company financially solvent even if it isn’t currently making a profit.
- Raising money. Investors and potential buyers find companies with good credit more attractive than ones with bad credit. It is easier for them to raise and manage funds.
- Purchasing equipment. Equipment that saves money over the long term can still require a considerable upfront investment.
- Building business relationships. Every successful business needs to partner with vendors, suppliers, merchants, and other companies and business people. Good business credit facilitates this by allowing a company to pay its debts on time and otherwise build trust with others.
- Qualifying for contracts. This can depend in part on whether a company has built up good business credit.
- Applying for loans. The Small Business Administration (SBA) and other lenders look at a company’s business credit report when deciding loan eligibility.
Apply for a Tillful business credit card and start building business credit.
How Business Credit Works
Setting up business credit for the first time is an involved process. There are certain steps you need to follow to establish business credit and more steps to follow to build business credit. Here is a rundown of how business credit works step-by-step.
Establishing Business Credit
To establish business credit, you’ll need to register your business as a formal business structure. LIkely you’ll want to form an LLC. Next, you’ll need to establish fundability, establish net 30 accounts, get business credit cards, and obtain business loans.
The following steps will help you establish business credit:
1. Form an LLC
Before you set up business credit, you need to establish your business as a separate legal entity – either an LLC or a corporation. We recommend forming an LLC to start because it’s a less complicated business structure.
2. Establish Fundability
Your company has to be fundable in order to establish business credit. This requires a number of steps, including:
- Getting an Employer Identification Number (EIN).
- Getting a business phone line with a 411 directory listing.
- Establishing a physical address (not a P.O. box, UPS mailbox, or virtual office) and making sure all official business documents list it.
- Ensuring that all official business documents correctly list your business name.
- Setting up a website and business email account.
- Setting up a business bank account.
- Partnering with companies that help build business credit.
See our guide for more help with establishing business fundability.
3. Establish Net 30 Accounts
Net 30 accounts are lines of credit that vendors grant to businesses and are a good way to help establish business credit. They must be paid within 30 days of the invoice date – the sooner, the better. Some net 30 vendors report to the business credit bureaus, while others don’t.
Recommended: Use our net 30 vendor list to help start building business credit.
4. Establish Store Credit Card Accounts
After you build up a six-month credit history, you’ll need to open store credit cards to establish additional lines of credit. This also will help build your business credit history.
Recommended: Check out our review of the top in-store credit cards.
5. Apply for a Working Capital Loan
Another important task after six months is to apply for a working capital loan. This line of credit from a bank provides funding for your business. A working capital loan frees up cash flow, lets you pay interest only on what you spend, keeps sole ownership interest in your business, and has a variety of other benefits.
6. Apply for Secured and Unsecured Business Credit Cards
A secured business credit card requires a deposit that’s usually equal to the credit card limit. An unsecured business credit card doesn’t require a deposit. Rather, you obtain a credit line based on your company’s credit profile and scores.
There are advantages to both types. Apply for a secured business credit card first, and then an unsecured one a year later.
Recommended: Read our guide on how to set up business credit for the first time.
How to Build Business Credit
Building and keeping up with business credit can be hard work, but keeping your company financially healthy is worth it. To build and maintain good business credit for your business, follow these steps:
1. Build Business Credit History
A good business credit history indicates to creditors that your company will timely repay its loans. Build your business credit history by:
- Paying bills and credit lines on time.
- Playing down debts.
- Keeping spending under control.
- Setting up a net 30 account.
- Increasing your number of credit lines.
- Applying for business loans and credit cards.
2. Avoid Critical Mistakes
There are several traps to avoid when building business credit. It is important to avoid these mistakes because they can set your business credit back and potentially harm your relationships with creditors. These include, among others:
- Using predatory lenders
- Paying business debts with personal accounts
- Using a net 30 vendor that doesn’t report to credit bureaus
- Having outdated business information
3. Monitor Your Business Credit
Like monitoring your personal credit, monitoring your business credit requires pulling your business credit reports and checking your business FICO score regularly.
Some of the major business credit reporting agencies and the scores they provide include:
- FICO Small Business Scoring Service (SBSS) Score (scores creditworthiness from 0-300).
- Dun & Bradstreet PAYDEX Score (scores creditworthiness from 0-100).
- Experian Intelliscore Plus Credit Score (scores creditworthiness from 1-100).
- Equifax Payment Index Score (scores creditworthiness from 1-100), Business Credit Risk Score (scores risk from 101-992; the higher the score, the lower the risk), and Business Failure Score (scores risk from 1,000-1,610; the higher the score, the better likelihood your business will still be around in 12 months).
Learn more about how to pull your business credit reports and check your business FICO score with our guides:
When you pull a report, check it for errors and report any you find to the appropriate credit reporting agency.
Types of Business Credit
There are many types of business loans and credit options available to small businesses. Some of the more common ones include:
- Trade Credit: A trade credit is a line of credit that a business can use to purchase goods and services. This type of credit is usually given to agricultural, manufacturing, and construction businesses. It allows businesses to purchase goods and services from other businesses. These are frequently referred to as net 30 accounts.
- Business Loan: A business loan is a loan that a business can use to finance specific projects or purposes. It is a type of short-term loan that does not require the business to pay interest.
- Working Capital: Working capital refers to the cash that a business has on hand. Be prepared to provide documentation of your company's financial status and future plans. Working capital loans can be a valuable tool for businesses of all sizes, so don't hesitate to ask your lender how best to use this funding option.
- Business Line of Credit: A business line of credit is a type of loan that a business can use to finance particular projects or purposes. It is a type of short-term loan that does not require the business to pay interest on the available credit limit, only what is actually borrowed.
- Construction Loan: A construction loan is a type of short-term loan that a business can use to finance the cost of construction projects, such as building new office space or remodeling existing facilities. It is a form of a working capital loan.
- Traditional Business Loan: A traditional business loan is a form of short-term loan that a business can use to finance the cost of working capital, such as inventory purchases and payroll costs. These loans are typically for periods of six months to one year.
Frequently Asked Questions
Business credit refers to the ability of a business to borrow money. This includes both secured and unsecured loans, which are also known as commercial loans. The term “business” can be used in many different ways. It could refer to any type of organization, including sole proprietorships, partnerships, corporations, limited liability companies (LLCs), etc.
Business credit is a type of debt that businesses use to purchase goods and services. Businesses typically have accounts with banks, which they can draw on for cash when needed. The bank may also lend them money against the collateral of their assets, such as inventory, equipment, real estate, etc.
Having business credit is beneficial because it allows businesses to buy things without having to pay immediately. They can instead wait until they get paid, which gives them more time to save up money before paying. Having business credit also makes it easier for businesses to expand and grow.
To determine whether or not your business has good business credit, look at its financial statements. These will show you how much money your business owes and how much money it is making. You should see positive numbers in both categories.
You can also pull your business credit reports to find out your business credit scores. It is a good idea to do this monthly or at least quarterly to ensure tradelines are being reported correctly.
Business credit is a form of financing that businesses use to buy things like equipment, inventory, and other assets. It’s also known as commercial or corporate borrowing. Businesses can get loans through banks, finance companies, and other financial institutions.
The purpose of a business credit card or charge card is to provide an additional source of cash for businesses. These cards also provide access to financing when other sources may not be available, such as when you need to buy inventory and don’t have enough cash on hand. Business credit cards also help you build
The three major business credit reporting agencies in the United States are Equifax, Experian, and Dun & Bradstreet. These companies collect information about your financial history from lenders, partners, debt collectors, and other sources to create a report that is used by businesses and lenders when deciding to extend credit lines and loans.
Personal and business credit are similar in many ways, as both signal to a lender how creditworthy the party (whether an individual or a business) is. That affects the party’s ability to obtain a credit card or loan, as well as the interest rates they will pay.
That said, personal and business credit are based on different things. Personal credit is based on someone’s debt payment history, total debt load, and other factors related to their individual finances. Business credit is based on a company’s financial history and health, not the owner’s. That means a business owner with excellent personal credit may still struggle to obtain a business loan if their company has trouble paying its debts.
It’s important to keep personal and business credit separate. Using personal guarantees to obtain business credit can expose the owner to serious financial problems if the business defaults on a loan or credit card. It also makes it harder for potential lenders to accurately gauge the company's financial health.
There are three primary levels of business credit, including:
- Level 1: The lowest level of business credit is a short-term loan and will be paid back within two years. It’s usually used for small purchases such as office equipment or furniture.
- Level 2: A medium-term loan that can be repaid over three to five years, depending on the amount borrowed. Businesses often use this type of loan to purchase machinery or buy new premises.
- Level 3: A long-term loan that is repayable over seven to ten years. These loans are typically used to finance major investments such as building extensions, new offices, or buying land.
