What Is Business Credit, and How Do You Build It?

Jill Beirne Davi

You probably know that credit is a way to evaluate your trustworthiness as a borrower, using a credit report (documentation of your past borrowing and accounts) and a credit score (a three-digit number that represents your history at a glance).

But here’s a curveball for you: What do you know about business credit?

Whether you’re a business owner or simply dream of striking out on your own one day, read on to find out how business credit differs from personal credit, why it’s so important and how to establish it for your own company.

Why Business Credit?

At its core, business credit is similar to personal credit—it represents your business’s ability to borrow money from authorized lenders, based on its past actions.

Personal credit, used to evaluate everything from your readiness for another credit card to the interest rate for your mortgage, is linked to your personal information—all contributing accounts are held in your name and with your Social Security number. Business credit, however, is linked to the business entity with a separate tax ID number. Once you establish business credit, a change in your personal credit history, like a foreclosure or late payments, won’t affect your business credit (and vice versa).

Business credit, like personal credit, is something to build before you need it. Of course, if you’re considering starting a business, emergency savings is important to have, but there’s always the chance that something might not go according to plan. At some point, your business may need access to credit to cover unexpected costs (think a sudden rent hike or cash flow issues) … so you don’t want to wait to until you’re backed into a corner to apply.

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A common mistake many business owners make is funding their business expenses through personal lines of credit or personal credit cards, which in some cases makes them financially liable for the business entity’s actions. For example, the owner of a bakery who uses his own funds to buy supplies and pay the rent could be personally liable when he hasn’t paid in three months and creditors come a-knocking.

Plus, as a business owner, you’ll most likely be requesting loans for both your personal and business accounts, each of which require a lender to ask a credit bureau about your history. This means you’ll get more inquiries than someone who doesn’t own a business—and since each inquiry dings your score, it’s important to spread them across two different files to lessen their impact. As an added bonus, establishing business credit early on could mean that you receive better interest rates on loans when it’s time to apply, since you’ve had time to build a solid business credit history.

How to Get Started

The first step in establishing this independent credit is to make sure your business is a business, legally. If you haven’t filed the paperwork that makes your business official in the eyes of the bank and the I.R.S., you’ll need to do that before anything else. For more information on how to go about this, visit the Small Business Association website.

Next, you’ll need a separate business mailing address, phone, and name as well as a tax ID number from the I.R.S. Separate from your Social Security number, this number is known as a federal tax identification number (FIN) or an employer identification number (EIN). You can apply for your EIN directly through the I.R.S. website, which is a free service that will process your application within minutes. Once you’ve done this, you can open a checking account and savings account in the business name using the EIN number and deposit funds.

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The last step is registering your business with at least one credit reporting agency. Before going through the process, make sure you don’t already have a credit profile by contacting Dun & Bradstreet, which issues the most widely used company identification number, called the D-U-N-S® number. Once you have a D-U-N-S® number, D&B will then set up a credit file for your business. Note that while credit bureaus such as Experian and Equifax also offer business credit services, the Small Business Association (SBA) primarily recommends the free service from D&B. Fun fact: While the pinnacle of a perfect personal credit score is 850, your business credit score is measured from 0-100, with anything over 75 considered excellent.