How to Build Your Business Credit Score

Opening and using a business credit card is a proven strategy to build business credit. Through careful card management, your firm can establish a favorable financial track record and demonstrate its creditworthiness.

These efforts demonstrate to potential lenders that you’re a low-risk investment, giving them the confidence to lend you money down the road.

Lacking a corporate credit profile, one of the central ways entrepreneurs obtain a loan or line of credit is to provide a personal guarantee. To avoid this potential liability and enable your firm to grow and thrive, use a business card to build your business credit.

How to Set Up a Business Credit Profile

To build strong business credit, be sure to transact with card issuers and other creditors that provide on-time payment information to reporting agencies. To have that information reported, you’ll need to first create a business credit profile.

The following actions will help you jumpstart your credit profile:

• Create a formal business entity — Establishing a credit profile for a sole proprietorship can be challenging because these business entities generally remain tied to your personal credit report. Instead, consider incorporating your business or setting it up as a limited liability corporation (LLC).
• Acquire an Employer Identification Number (EIN) — Like your social security number, an EIN is a unique number used by the Internal Revenue Service to identify your business for tax purposes.
• Set up a business phone line — Use your business name to establish a dedicated number and be sure it is listed where people will find it (i.e., com or the Yellow Pages).
• Open a business bank account — Using your company’s legal name, EIN, and phone number, establish a business checking account at the bank of your choice.
• Register for your D-U-N-S number — Dun & Bradstreet (DNB) is the business credit bureau that designed the Data Universal Numbering System (D-U-N-S), and they freely issue these nine-digit numbers to companies that request them. When a D-U-N-S number is created for your company, you are also establishing a Dun & Bradstreet credit profile.

With a registered business entity and an established credit profile, your firm can start building its credit score.

Tips for Building Business Credit with Credit Cards

Creating business credit is not as straightforward as opening a credit card account in your company name. You’ll need to follow a well-planned strategy to maximize your account’s impact on your credit score.

Start with Secured Credit Cards

Most credit cards are unsecured, which means you don’t have to risk valuable collateral. This is better for you as the borrower, though it leaves the lender vulnerable to loss if you default. It also makes it challenging to qualify for a traditional credit card because credit card companies typically steer clear of businesses that lack a proven track record.

A secured card works differently:

• Your business deposits cash which the issuer holds as collateral.
• Next, you’ll receive the card with a credit limit equal to your deposit amount.

This arrangement is mutually beneficial to you and the issuing financial institution. The credit card company avoids risk — if you don’t pay your bill, they’ll keep your deposit. Meanwhile, your on-time payments are reported to the credit bureaus and serve to establish a positive business credit rating.

Keep Credit Card Debts Low

Focus on how much you’re spending in relation to your credit limit. This connection is called your credit utilization ratio: A percentage derived by dividing your card balance by the maximum amount you could spend using your card.

Credit card bureaus reward low credit utilization with higher scores. An excellent way to build your score is to use less than 30% of your total credit limit, though 10% is considered ideal — generally, the lower this number, the better.

Use Your Card for Business Purchases

While it is never advised to get over your head in credit card debt, it can be just as damaging to let a card sit idle. A credit card account with a zeroed-out balance may hinder your efforts to raise your score or build a report attractive to lenders.

Instead, use your card to make business purchases you’ll be able to cover when the bill comes due.

Make On-Time Payments

Business credit card accounts can only build your credit if you pay your bills on time or early — every time.

Payment history is a major contributing factor to your business credit profile, and nothing will tank your score faster than late payments.

Check Your Credit Frequently

Business credit bureaus do not list your card issuers’ names on your report. This makes it challenging to figure out how each card and purchase is impacting your score.

To optimize the way you use credit to boost your business score, be watchful for changes on your report. By tracking patterns, you’ll be better able to spot card activity that’s having an impact.