You’ve just come up with the world’s best business idea. You’ve worked out all the glitches. The only problem is you’ve built just one product, and you don’t have enough money in your business bank account to buy the materials needed to build more.
One option is to find backers who are willing to invest in your business and become co-owners. They’ll supply you with capital, but they’ll also take a share of your profit.
Another option is to secure financing and keep control of your company. That’s where your business credit history comes in.
This guide shares the importance of credit-building for ecommerce businesses alongside six techniques to establish business credit.
What is business credit?
Business credit is a company’s financial reputation and track record in terms of borrowing and repayment. It is assessed through factors such as payment history, credit utilization, and business credit score. Having a good business credit score can improve your ability to secure loans for your small business.
How does business credit work?
There are three major business credit bureaus that rank businesses and assign credit scores to determine their creditworthiness: Dun & Bradstreet, Equifax, and Experian.
These business credit bureaus use factors like a company’s track record on previous loan repayments, credit utilization, and the personal credit histories of a company’s owners to create credit scores and credit reports for businesses. Lenders use a business’s credit profile and score to measure the risk of lending to your company.
Six ways to build business credit
- Register your business
- Register for a Dun & Bradstreet number
- Apply for a business credit card
- Register for relevant net 30 accounts
- Pay all bills on time
- Minimize risk by avoiding judgements and liens
Establishing business credit is a process that can take several years, which can make it a daunting prospect. However, the following steps can raise your business credit score and get you on the right path.
1. Register your business
Before you apply for business credit, you need to register your legal business name with the appropriate government agencies.
The process for registering will depend on where your business is located. In the US, you may need to register your business entity at the local, state, and federal level. Additionally, you will also need to get a federal employer identification number (EIN) from the IRS, which can be done for free on its website.
The length of the registration process will depend on the business structure you have chosen. Sole proprietor registration is the simplest; corporate registration is the most complex.
2. Register for a Dun & Bradstreet number
The Dun & Bradstreet number, referred to as the DUNS number, is a unique nine-digit number used to identify a business. Creditors in the US will ask for your DUNS number and your EIN before they agree to issue you any business credit. Many other countries use the DUNS number to identify businesses.
3. Apply for a business credit card
Business credit cards are a major asset when it comes to building credit. They function almost exactly like personal credit cards by allowing you to pay for your expenses using the card.
“If you need to build your business’s credit, grab a prepaid credit card,” Jared Day, CEO and co-founder of Nuleev says. “It’s a fast and easy way to use a revolving line of credit and boost the business’s score.
“However, since you’re essentially just paying fees to build credit with this method, look into getting a business credit card first. Even if it has a very low limit, or you have to provide a personal guarantee, you should be able to get some cash back rewards to at least offset the fees, or possibly even surpass them.”
4. Register for relevant net 30 accounts
Another important way to build business credit is to register for net 30 accounts, which allow you to purchase goods for your business on credit. The debt for the purchased goods has to be paid back within 30 days.
Each supplier requires you to register for a separate net 30 account, so most businesses only register with suppliers that they expect to use often. Consistently paying off your net 30 accounts on time will build your credit.
5. Pay all bills on time
The key to building business credit is paying bills on time and often. Every credited bill you pay out of your business bank account can contribute to your credit score, including utility bills and rent. So long as you are consistently making on-time payments, you should see your business credit score grow as the years pass.
6. Minimize risk by avoiding judgements and liens
Avoiding judgments and liens is crucial when building business credit, as it helps maintain a positive credit profile. Judgments and liens can significantly impact your creditworthiness, making it difficult to increase your business credit score, secure financing, or establish favorable business relationships.
Four reasons to get and maintain good business credit
Good business credit isn’t just nice to have. A strong credit history is something necessary that you’ll lean on if you do any of these things:
- Get access to funds
- Protect ownership
- Protect personal credit
- Build business credit for the future
1. Get access to funds
Business credit is a simple way to access funds that you can invest in your business. From product development to acquiring other businesses, it’s easier to acquire capital through financial arrangements like a line of credit (LOC) if your company has a good business credit file.
2. Protect ownership
Unlike seeking out investors, securing capital through business credit—such as a business credit card service like Shopify Credit—does not affect the ownership of your business. You can grow your business without trading equity.
3. Protect personal credit
Personal credit impacts your ability to get personal loans like mortgages. Separating personal and business credit cards gives you an added layer of protection. If your business struggles to repay its loans on time or has bad credit, this will not affect your personal credit score.
4. Build business credit for the future
Even if you don’t need business credit to access money right now, there is a chance you will in the future. Building a strong business credit account can give you better borrowing opportunities in the long run.
How does business structure impact credit?
There are different kinds of business structures available to businesses, and each has different obligations when it comes to credit.
- Sole proprietor. Sole proprietorships are businesses owned by a single business owner who is solely responsible for the business’s debts. Should the business go bankrupt, creditors are allowed to seize the personal assets of the business owner.
- Limited partnership (LP). Limited partnerships consist of multiple owners, of which only those designated as general partners are personally liable for business debts. The other partners are called limited partners. They have less control over how the business is run but are not personally liable for its debts.
- Limited liability partnership (LLP). In an LLP, all owners of the business are considered partners, and have at least some liability protection in the case of negligence or misconduct by other business partners. However, whether the owners are completely protected from personal liability in the event of their own negligence varies from state to state.
- Limited liability company (LLC). An LLC is a business structure that shields a business owner’s personal assets from any claims made against the business. LLCs are required to pay special fees to both national and state governments to operate, making them more expensive to maintain.
- Corporation. In a corporate business structure, shareholders are not liable for the company’s debts beyond the amount of money they have invested. However, unlike LLCs, creditors can sometimes claim the company’s assets in the event of a default, wipe out shareholders’ voting rights, and change the leadership of the company.
Types of business credit
Most businesses need to purchase equipment, materials, or inventory from a vendor to accomplish their goals. For example, the owner of a restaurant will need to buy ingredients used to prepare meals.
Sometimes, large vendors may allow business owners to create what’s called a “net 30 account.” A net 30 account gives a business the opportunity to buy materials on credit with repayment expected within 30 days. Many small businesses use these purchases as a way to build business credit.
Supplier credit involves credit from suppliers to business owners buying inventory or materials for their businesses. Also referred to as trade credit, this type of business credit usually refers to longer-term and more complex agreements than vendor credit. They’re often used in international imports and exports.
This is business credit issued for services used by the company owner. Examples include utilities like electricity, gas, water, and internet.
Usually, both businesses and individuals pay utility bills after services have been issued at the end of the month. Paying service bills on time can help improve your payment history and build your business credit score.
This is a way to borrow that is easily available to the public. Examples include bank loans, mortgage loans, and credit card loans. The better your business credit score, the more of these loans you will be able to access.
Business credit card
One of the most common ways to build business credit is through business credit cards, which allow you to pay for expenses with a single card and pay the bill at the end of each month.
Many business credit cards are available to companies with little or no business credit history, which makes them an option for new business owners. However, there are credit limits for new businesses and high-interest rates if the balance on the card is not paid off in the current billing cycle, which is usually 30 days.
Monitor your business credit
Monitoring your business credit is crucial for financial health and growth. It helps identify errors, detect fraud, and rack creditworthiness, and ensures favorable terms for startup loans and partnerships.
Use the techniques we’ve outlined in this article to improve your business credit report. From registering for a DUNS number to applying for business credit cards, you’ll soon start to see an improvement in your business’s credit score—and increase the likelihood of being able to secure financing for your company.
Ready to create your business? Start your free trial of Shopify—no credit card required.
Business credit FAQ
How to build credit with an EIN number?
- Apply for a business credit card.
- Keep your credit utilization low.
- Pay bills and suppliers on time.
- Avoid judgements and liens.
- Register for net 30 accounts.
Does an LLC have its own credit score?
All businesses, including LLCs, have their own business credit scores. However, the personal credit scores of the owners of the LLC can have some impact on the business credit score of the LLC, and vice versa.
Is it hard to build business credit?
It is hard to build business credit if you’re a small business, since the process takes time. Prove your business can be trusted with loans by applying for a business credit card, paying bills on time, and registering for a Dun & Bradstreet number.
How long does it take to build business credit?
This depends on many factors, including your business structure, the personal credit of you and any partners, and the business’s cash flow. For new businesses, it usually takes between one to three years to build enough business credit to be eligible for loans. If you continue to pay back your loans on time, your business credit score will continue to grow.