Many businesses start out relying on the good credit of their owners. But when your business has its own good credit that's separate from yours, it has more options for borrowing and can negotiate more favorable terms. Business credit also can help protect you from personal financial risk if your business begins to struggle.
Building business credit isn’t difficult, but it takes time and attention. A useful place to start is by understanding what’s included in a business credit history.
Business credit history and scores
You’re probably familiar with the system that tracks your personal credit history. If you’ve ever rented an apartment, gotten a car loan or applied for a mortgage, you know that your FICO® score is a critical factor. A similar but completely separate system exists to help lenders evaluate whether to lend to a business.
Financial institutions and other large companies report credit-related business activities, which business credit agencies use to compile a record.
Every entry in that record contributes to an overall sense of the creditworthiness of a business, typically summarized as a numeric score between 0 and 100. This record can contain a history of credit card payments, how lines of credit have been used, whether a loan is in good standing and even whether invoices are paid on time.
Each credit reporting agency weights factors differently when calculating a score. Beyond how a business uses credit, additional considerations in a business credit score include:
- Age of oldest financial account
- Company size and history
- Established trade relationships
- Industry factors
How to improve your business credit scores
There’s no single right way to establish creditworthiness, but at a basic level, you need to use credit to get credit. Making purchases with a credit card and paying the balance monthly is one simple way to build credit. Want to do more? Here are other ways to keep your business credit scores moving in the right direction.
Establish your business presence.
The more you do to establish your business as a legitimate, well-managed enterprise, the better you’ll look to lenders. At a minimum, make sure your business has an employer identification number, bank accounts in the name of the business, and any required permits or certifications. It also can help to set up your business as a corporation or a limited liability company.
Obtain only the credit you need.
Limit the number of credit cards you open. If your credit history makes your business seem overexposed or you appear sloppy with credit, it can hurt your scores.
Pay what you can and pay on time.
Partial payments damage your business credit scores less than late or skipped payments. Make sure to pay whatever you can when the payment is due. A good-faith effort shows current and future lenders that you will always do your best to pay what you owe.
Establish a good relationship with vendors.
Some vendors report on-time payments and overdue invoices to credit agencies. If you think you might have a hard time paying an invoice, ask the vendor to work with you. This could mean setting up a payment plan or agreeing to a new due date. And when your cash flow is good, make it a point to pay early. Vendors will be appreciative, and it can boost your business credit scores even further.
Keep an eye on your credit.
Credit utilization is necessary for building credit, and so is making sure you keep some space between your balance and your limit. By doing that, you can safeguard your credit score and ensure you have credit available when you need it. But beyond the numbers, just developing a habit of staying on top of your credit and managing how much you use is one of the smartest ways to stay financially healthy.
The right capital at the right price
Any business may need credit from time to time. To improve your chances of getting the right type of business capital at the right price, establish a history separate from your personal credit history that shows how your business has used credit responsibly.
Ready to start building your business credit? Talk with a Chase business banker about the types of credit that fit your business needs.