For entrepreneurs it’s crucial to understand how to establish business credit, unless you happen to have an enormous pile of money sitting around (unfortunately, most of us don’t enjoy such a luxury).

If you ever want to finance a large purchase, get access to funds quickly to fulfill a large order, or simply need to cover unforeseen expenses, your credit will determine whether or not you can make it happen.

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Not to mention, your business credit score lets potential lenders know how much of a risk they’ll take by giving you money. Possible partners and vendors could also check your company’s credit history to help them decide whether to work with you or not.

Although it may seem obvious to some, it’s in your company’s best interest that you have quality credit backing you up.

Here are seven steps outlining exactly how to build your business credit, so you can get the funds necessary for success whenever the need arises.

Table of Contents

  1. Step 1: Know Who is Involved
  2. Step 2: Understand Business Credit Scoring
  3. Step 3: Create a Corporation or LLC
  4. Step 4: Apply for a Business Tax ID (EIN)
  5. Step 5: Set Up a Business Bank Account
  6. Step 6: Open Business Credit Cards & Trade Lines
  7. Step 7: Apply for a Merchant Account
  8. One Final Note for High Risk Merchants

Step 1: Know Who is Involved

man taking notes in a well-lit library, books stacked in front of him

It never hurts to read up on a subject.

There are three main business credit reporting agencies.

  1. Experian Business
  2. Equifax Business
  3. Dun & Bradstreet

While Experian and Equifax collect data from lenders, credit card companies, and public records, if you want to get a credit file from Dun & Bradstreet you’ll need to get a D-U-N-S number via registration.

LexisNexis Risk Solutions is another company that reports business credit activity. While it isn’t a credit bureau, it uses advanced analytics and data to provide information about businesses that may not have a well-established credit file yet. Specifically, LexisNexis links LLCs, DBAs, and even state and local government registrations to help lenders get a fuller picture of a business’s credit-worthiness.

Also, some lenders and credit card companies report payment information on business accounts to the Small Business Financial Exchange (SBFE). This isn’t a credit bureau either, but it passes information to each of the three main credit reporting agencies. It’s important to be aware of it as you create a credit footprint for your company.

Step 2: Understand Business Credit Scoring

eye glasses sitting on top of a book, reading concept

There are different credit bureaus, and each operates differently.

Dun & Bradstreet’s “Payment Index” or PAYDEX credit scores range from 1 to 100. Higher scores indicate a history of trustworthiness – paying bills and debts on time and in full. A good score will help you get a loan or line of credit to help your company thrive and grow.  will also determine the terms of the loan.

Here are the general PAYDEX score guidelines, to give you an idea of where you might want to land:

76-100: Low Risk

51-75: Low to Medium Risk

26-50: Medium Risk

11-25: Medium to High Risk

1-10: High Risk

The Financial Stability score then estimates how likely a company is to experience financial hardship or fail in the next year. This score ranges from 1 to 5:

(1) Low Risk

(2) Low to Medium Risk

(3) Medium Risk

(4) Medium to High Risk

(5) High Risk

Since business credit scores don’t fall under the Fair Credit Reporting Act (FCRA), anyone who wants to look at a company’s credit score can do so for a fee.

Additionally, each of the credit bureaus may offer information on collections, tax liens, bankruptcies, trade payment details, key facts about the company, industry classification, corporate registration, banking, and insurance information.

You can see a sampling of what’s in your company credit report by accessing these free services as well:

Credit.net: Free 7-day trial and 7 free credit reports

Nav: Free credit monitoring, credit snapshot, and insights to help build your organization’s credit

CreditSignal: Monitors Dun & Bradstreet credit report and will alert you when the scores shift

Once you’ve established a credit file for your firm, it’s important to stay on top of it. Check for changes often so you can identify mistakes, and if you find incorrect information then let the credit bureau know about it immediately.

Step 3: Create a Corporation or LLC

man writing notes in a notebook sitting in front of his laptop, indoors

Creating an LLC can be a solo move, or done as a group.

Creating a legal entity in the form of a corporation or LLC helps you separate your business from your personal life. Since your company and individual credit history blurs in the case of a sole proprietorship, incorporating your company is an essential part of keeping your entrepreneurial missteps from ruining you financially.

When it comes to the formal structure, you have two main options:

1. Limited Liability Company (LLC)

Establishing an LLC legally separates your personal financial affairs from those of your company. In the event things head south, your personal assets won’t be at risk – only the money invested in the LLC. They are generally preferred by many because they are a bit more lax in terms of government requirements.

2. S Corporation

Forming an S Corp also protects owners from personal liability, but differs slightly when it comes to governmental regulation. To obtain an S Corp designation, company owners must register their business with the federal government and follow certain operational and filing processes, including strict rules regulating (and restricting) how shares are distributed.

There are pros and cons to both that you should consider before selecting the right one for you.

Step 4: Apply for a Business Tax ID (EIN)

analog calculator on a white table, checkbook with salaries written on it, stack of cash

Getting an EIN is actually pretty straight forward.

A business’s Employer Identification Number, also known as a Federal Tax Identification Number, is an essential item for building your business – one major reason being that you need it to even open a company bank account.

An EIN also allows you to hire and pay employees, pay federal taxes, and get the appropriate permits and licenses to run your business.

Applying for an EIN online takes only a few minutes, and the IRS issues the number immediately. You must complete the short application when the IRS is open (which happens to be Monday through Friday, between 7am to 10pm EST).

Step 5: Set Up a Business Bank Account

old grey classical architecture bank, white sky

Getting a bank account doesn’t require being there in person these days!

Using your legal company name and your EIN, you’re now eligible to open a business bank account. You can do this at the bank you use for personal finances, or choose a different bank – it’s up to you.

Necessary Documentation

Here is the primary documentation you’ll need to open the account:

  1. Organizing Document filed with your state
  2. State Business License
  3. Business Name Filing Document
  4. Partnership agreement, if applicable

LLCs will also need their Articles of Organization and EIN, whereas corporations should have their Articles of Incorporation and EIN close at hand.

Step 6: Open Business Credit Cards & Establish Trade Lines

female hand hitting an analog calculator, addressing an invoice on a clipboard

Some studies show that doing minor tasks by hand can help improve memory.

You should now be ready to open a company credit card using your EIN number and formal company name. Using that card responsibly, just as if it was your own personal credit card, will help you gradually improve your business credit score.

Tip
Late payments can ruin your credit and ability to get loans, so be sure to implement autopay if possible.

Trade Lines

It’s also wise to learn how to open trade lines with suppliers and vendors. Many of them report to the credit bureaus, and if you have a positive relationship with one or several, their word could help you build your credit score.

Note that you’ll need your EIN and a Dun & Bradstreet account number to get these credit lines set up. If you followed the previous steps, however, you should already be in good shape.

Step 7: Apply for a Merchant Account

credit card transaction inside, hand handing over a blue credit card

Debit or credit – why not both?

In short, a merchant account allows companies to accept electronic payments (things like credit and debit cards). Once you’ve established yourself as a reliable vendor to the payment processor who opens your merchant account, your business credit will gradually improve.

Merchant accounts are a big part of simply handling transactions, so most businesses today need at least one.

A merchant account provider charges fees in one of several ways:

Tiered Rate or Bundled Pricing

Consistently priced across all card brands, these fees can be deceptive because tiers change based on a variety of factors. Such pricing often looks better than it actually is.

Interchange Plus

Credit card brands determine the per transaction and set percentage you’ll pay for each transaction depending on the card type, transaction method, and card category. The merchant account provider charges a fee on top of that.

Flat Rates

You’ll pay a percentage of each transaction plus a per-transaction fee.

Free Processing

If you’re curious about how free credit card processing works, then you should definitely look further into it. In essence, the normal interchange fees levied by the Card brands get packaged into the final price of an item or service you sell to your customer – generally into a negligible percent that most people wouldn’t notice unless they were closely paying attention.

While some companies and consumers find this unethical, as a business you can pair free processing with better rates for cash or debit as a way of deterring pricey credit card transactions. It just depends on how you look at it.

A Note for High Risk Merchants

Managing your money flow can be a challenge, and that’s especially true if you run a business deemed “high risk” by payment providers. Finding the right merchant service provider running such an operation is a crucial component of building good company credit, but it can be a difficult process.

If your business in particular is considered risky, you’ll likely need to locate a merchant service provider specializing in high risk merchant accounts. Because at the end of the day, using a merchant service provider is an important element of building your company’s credit.

Plus, chargebacks have a negative impact on businesses, and merchant account services can help your company mitigate chargebacks. Some payment processors offer extra fraud prevention features to help your company preserve its credit – make sure yours does before signing any contracts.

Closing Remarks

Understanding how to build your business credit score isn’t an overnight process. The effort required to set your business up with good credit is well worth the squeeze, though.

Curious about how you can improve your score with an effective merchant service provider? Get in touch with us today and we’ll give you the rundown.

About the Author

Geoff Scott is a Payments Consultant for Motile LLC, where he strives to connect users across the internet with processing solutions for their small businesses. He also loves Thai food, craft beer, and an exhilarating game of squash (when he's off the clock, of course).