How to build business credit as a new business

Having good business credit is a crucial element of running a successful, long-lasting business. Much like personal credit, business credit signals to lenders how your company handles its finances and, specifically, its debt. Strong business credit can increase your business’s purchasing power by potentially making it easier — and in some cases cheaper — to secure loans and other financing. It can also be a useful tool for negotiating better terms with vendors.

Poor business credit, on the other hand, can hurt your company’s chances of taking on the debt necessary for growth. But it takes time to build a financial history. So how can you prove to lenders that your business is worth the risk when you’re starting out? Take these steps now to lay the groundwork for solid business credit.

Establish your business

To start building a strong foundation for your business credit, consider establishing your business as a legal entity. This means choosing to form a limited liability corporation (LLC), a limited liability partnership (LLP) or a corporation. A sole proprietorship is a viable option for some businesses, but this structure won’t allow you to build business credit separate from your personal credit

Registering your business as an LLC, an LLP or a corporation makes it a separate legal entity capable of building its own credit. This separation can also help form a protective financial barrier between you as the owner and your business. Depending on your business structure and location, you’ll likely have to register your business with its legal name with the secretary of state.

Next, you'll want to apply for an employer identification number (EIN) with the IRS. This nine-digit number is like a Social Security number for your business and allows you to file business tax returns, open a business bank account and, most important, apply for business credit.

Once you have established your business as its own legal entity, you can start taking steps to build up its credit.

Understand what affects business credit

Building your credit means developing a track record of positive financial habits, such as paying back your lenders and maintaining a manageable amount of debt. When you apply for business credit — such as a line of credit, business credit card or loan — lenders will evaluate several key factors:

• Reliability: Whether you consistently pay your creditors early or on time.
• Capital invested: How much you have invested in the business — a larger investment often signals a stronger commitment to the business’s success.
• Credit capacity: The business’s ability to repay its creditors.
• Personal credit standing: Maintaining a strong personal credit score and assets for collateral, which can make it easier to secure credit.

Open a business bank account

Separating your personal finances from those of your business is an important step toward building credit for your business. The IRS requires all incorporated business to have a business bank account, so it’s a good idea to set one up as soon as you have your federal EIN.

Opening a business bank account is also an important first step to building a relationship with a financial institution, one that will become a banking partner when you’re looking to grow operations through a business credit card, business line of credit or business loan. Using a business credit card is a convenient way to pay for everyday business transactions while at the same time helping to build business credit. Having a bank account and credit card for your business also makes it easier to track business purchases, which will make filing taxes more efficient, and creates a professional image for your business when engaging with vendors.

Establish accounts with vendors

You can build business credit in much the same way as you’d build personal credit — by making purchases and establishing accounts with suppliers or vendors. Some vendors will allow you to open a business credit file, such as a net 30 account, which allows you to defer payments to suppliers by up to 30 days. This not only helps you build credit but also gives you a way to better control your cash flow.

Remember that it’s important to work with companies that report to a business credit bureau. As you purchase material, inventory or services, your company’s debts and payments are recorded with business credit reporting agencies. These transactions contribute to a business credit report and, after several trade lines have been established, a business credit score. Each transactional relationship your business has with another company can be used as a trade reference on future credit applications.

Use business credit responsibly

Now that you know the steps for building business credit, there’s a crucial component to helping you maintain it: using that credit responsibly. To calculate your business’s credit score, agencies will review your company’s financial obligations and repayment history. That means any late or missed payments that have been recorded with credit reporting agencies could negatively affect your business’s credit score. Follow these tips to build good business credit:

• Pay bills early or on time. Doing so signals to lenders that your business can manage cash flow well, has enough money on hand to cover its expenses and has a history of paying creditors reliably. Consider spreading out your payments to help ensure you have enough cash on hand to repay your debts. This approach may also encourage your vendors or suppliers to offer discounts or allow for longer repayment terms.
• Keep credit utilization low. Credit utilization, calculated as the percentage of available credit that a company uses, is one of the factors that lenders use to assess a company’s financial health. A low credit utilization ratio signals that a business is managing cash flow effectively, while a high ratio may signal financial stress. In general, small businesses should aim to maintain a credit utilization ratio under 10%. Once a business’s credit utilization ratio reaches 30%, it begins to negatively impact their business credit score. When determining your credit utilization, keep in mind that having too many sources of credit can also negatively affect your score.
• Monitor your business credit. Checking your business credit report frequently — every few months — is important for knowing the strength of your company’s credit. There are two main credit bureaus that allow you to monitor your credit: Dun & Bradstreet and Experian. Monitoring your credit can provide insight into how best to improve your business credit and help you identify errors early.

How long does it take to build business credit?

Keep in mind that it takes time to build credit, though the timeline is unique to each company. It could take a few months or up to three years to build credit as a business, but each financial action your business takes is an important part of that journey.

Take the first step toward good credit

Speak with a Chase business banker to discuss how you can open a business bank account, one of the first steps toward building your business’s credit.