Business Credit
Jul 19, 2023

How to Start Building Business Credit: A Step-by-Step Guide for Small Business Owners

Master the art of building business credit: step-by-step checklist, common mistakes to avoid, and best practices for financing success.

How to Start Building Business Credit: A Step-by-Step Guide for Small Business Owners

Welcome to our comprehensive guide on building business credit for small business owners. Establishing a solid business credit profile is essential for accessing funding, securing favorable terms, and positioning your business for growth. This article will walk you through the step-by-step process of building business credit, including practical tips, strategies, and valuable insights.

Whether you're a startup or an established business, understanding the fundamentals of business credit and implementing effective credit-building practices can significantly impact your financial success. Let's dive in and unlock the power of business credit for your small business.

Why Building Business Credit Matters

Building a solid business credit profile is crucial for your small business's long-term success and financial health. Here are key reasons why building good business credit really matters:

  1. Separate Your Business and Personal Finances: By establishing business credit, you can separate your personal and business finances. This separation protects your assets in case of business liabilities or financial challenges.
  2. Access to Funding: Building business credit opens various financing options, such as business loans, lines of credit, and vendor credit. Lenders and financial institutions rely on your business credit history to evaluate your creditworthiness and determine the terms and rates of financing available to you.
  3. Better Terms and Rates: A strong business credit profile enables you to negotiate better terms, lower interest rates, and higher credit limits when seeking financing. With favorable terms, you can save money on interest payments and have more flexibility to invest in your business growth.
  4. Vendor and Supplier Relationships: Building business credit enhances credibility and strengthens your relationships with vendors and suppliers. It allows you to establish trade credit arrangements to purchase goods or services on credit terms and pay later. This can be beneficial in managing cash flow and building solid partnerships with key suppliers.
  5. Business Growth and Opportunities: A solid business credit profile positions your business for growth opportunities, such as expanding into new markets, securing larger contracts, or attracting potential investors. It instills stakeholder confidence and demonstrates your financial stability and reliability as a business.
Building business credit takes time and effort. Still, it is a strategic investment that can yield significant benefits in the long run. In the following sections, we will guide you through building and using personal credit history and leveraging your business credit profile to access funding and grow your business.

Understanding Net 30 Options for Establishing Credit

Net 30 terms are a popular option for small businesses looking to establish credit. Net 30 refers to the payment terms offered by suppliers, allowing you to make payment within 30 days of receiving goods or services. Here's what you need to know about net 30 options for establishing credit:

  1. How Net 30 Works: When you purchase using net 30 terms, the supplier extends credit to you by allowing you to defer payment for 30 days. This arrangement helps you manage cash flow by giving you time to generate revenue from the goods or services before making payment.
  2. Building Credit History: Net 30 arrangements allow you to build your business credit history. Timely payments on net 30 invoices demonstrate your ability to manage credit responsibly, which can positively impact your business credit score.
  3. Finding Net 30 Suppliers: Look for suppliers that offer net 30 terms and are willing to report payment history to business credit bureaus. This ensures that your on-time payments are reflected in your credit profile. You can search online directories and industry associations or contact suppliers to inquire about net 30 options.
  4. Establishing Relationships: Net 30 arrangements also allow you to develop supplier relationships. Consistently paying on time and maintaining a good business relationship can increase credit limits, more favorable terms, and access to additional products or services.
  5. Monitoring Credit Utilization: Monitoring your credit utilization ratio when using net 30 terms is essential. This ratio compares your outstanding credit balances to your available credit. Keeping your credit utilization low (typically below 30%) shows lenders and creditors that you manage credit responsibly.

Net 30 options can be an effective way to start building your business credit profile and establish relationships with suppliers. However, making timely payments and maintaining a positive credit history is essential to maximizing the benefits of net 30 arrangements.

Unlocking the Benefits of Business Credit Cards

Business credit cards offer a powerful tool for building and managing your business credit profile. Here's how you can leverage business credit cards to unlock a range of benefits:

  1. Separate Business and Personal Finances: A dedicated business credit card helps separate your business and personal expenses. This separation is crucial for building a solid credit profile and simplifying financial record-keeping.
  2. Establish Credit History: Business credit cards allow establishing a credit history specifically for your business. By making regular, on-time payments and keeping your credit utilization low, you can demonstrate your creditworthiness to lenders and improve your business credit score.
  3. Access to Capital: Business credit cards provide a convenient and readily available source of capital for your business. They offer a revolving credit line that you can use for various business expenses, such as purchasing inventory, covering unexpected costs, or managing cash flow gaps.
  4. Expense Tracking and Reporting: Most business credit cards offer robust expense tracking and reporting tools, making monitoring and managing your business finances more manageable. You can track your spending, categorize expenses, and generate reports for budgeting, tax purposes, and financial analysis.
  5. Rewards and Perks: Many business credit cards have rewards programs that allow you to earn points, cash back, or travel miles on your business purchases. These rewards can provide additional value and savings for your business, whether through cash back on everyday expenses or travel perks for business trips.
  6. Build Relationships with Card Issuers: As you use business credit cards responsibly and establish a positive credit history, you can build relationships with card issuers. This can lead to increased credit limits, better terms, and access to additional financial products and services tailored to your business's needs.

When utilizing business credit cards, it's essential to use them responsibly. Make timely payments, keep your personal credit card utilization low, and monitor your expenses to maximize the benefits while avoiding excessive debt.

Harnessing the Power of Lines of Credit

Lines of credit are another valuable tool for building business credit and providing flexibility in managing your company's credit score and finances. Here's how you can harness the power of lines of credit for your business:

  1. Access to Flexible Capital: Lines of credit provide you with a predetermined credit limit that you can draw from as needed. This flexibility allows you to access capital when needed, whether for covering unexpected expenses, taking advantage of growth opportunities, or managing cash flow fluctuations.
  2. Build Credit History: Similar to business credit cards, lines of credit offer a chance to build your business credit history. Using a line of credit responsibly and making timely payments can demonstrate your creditworthiness and strengthen your business credit profile.
  3. Control Interest Costs: With lines of credit, you only pay interest on the amount you borrow, not the entire credit limit. This gives you more control over your interest costs, as you can choose when and how much to borrow. By managing your borrowing wisely, you can minimize interest expenses and optimize your business's financial health.
  4. Flexible Repayment Options: Lines of credit typically offer flexible repayment options, allowing you to make interest-only payments or pay a percentage of the outstanding balance. This flexibility can be beneficial when your cash flow is tight, giving you some breathing room to manage your financial obligations.
  5. Strategic Business Growth: Lines of credit can be instrumental in funding strategic business growth initiatives. Whether expanding your operations, investing in new equipment, or launching a marketing campaign, a line of credit can provide the capital necessary to fuel your growth plans without needing a traditional term loan.
  6. Working Capital Management: Lines of credit can help you manage your capital effectively. They serve as a safety net during slower periods, ensuring you have access to funds to cover ongoing expenses and maintain a healthy cash flow for your business operations.
By following a step-by-step checklist and leveraging various credit options, you can strategically build and manage your business credit profile, setting your business up for success in the long run.

Step-by-Step Checklist: Building Your Business Credit Profile

Building a solid business credit profile requires a systematic approach. Follow this step-by-step checklist to establish and enhance your business credit:

  1. Establishing Your Business Entity and Obtaining an EIN: Choose the appropriate legal structure for your business, such as an LLC or corporation, and obtain an Employer Identification Number (EIN) from the IRS. This establishes your business as separate from yourself and is essential for building business credit.
  2. Choose a lower-risk NAICS code: As you navigate this process, it's important to consider various factors that can impact your creditworthiness. One of these factors is the selection of a low-risk NAICS code, which helps lenders identify the type of business you operate.

    Here are the top NAICS codes that are commonly perceived as higher risk by lenders:

    NAICS codes: Restaurants and Food Services
    NAICS codes: Brick-and-Mortar Retail Stores
    NAICS codes: Truck and Transportation Services
    NAICS codes: Construction Contractors
    NAICS codes: Real Estate Investing
    NAICS codes: Financial Services

    While these NAICS codes may be considered higher risk, it's important to note that each lender may have their own criteria and risk assessment methods. Additionally, businesses in these industries can still build strong credit profiles by demonstrating sound financial management practices, a solid track record, and strategic planning.

    When selecting a NAICS code for your business, it's essential to consider the risk perception associated with your industry and assess how it may impact your access to credit. Researching and understanding the risk profiles associated with different NAICS codes can help you make informed decisions and potentially choose a code that aligns with lower-risk industries, improving your creditworthiness in the eyes of lenders.

    By proactively managing your NAICS code selection and demonstrating a strong credit profile, you can enhance your chances of securing favorable financing terms and positioning your business for long-term success.
  3. Registering Your Business with Business Credit Bureaus: Register your business with major business credit bureaus like Dun & Bradstreet, Experian, and Equifax. This step ensures that your business information is included in their databases and can be accessed by lenders and vendors.
  4. Opening Business Bank Accounts: Open dedicated business bank accounts, including a business checking account and a separate business savings account. Maintain a strong banking relationship and ensure that all financial transactions for your business are separate from personal finances.
  5. Establishing Trade References and Net 30 Accounts: Build your business credit history by establishing trade references. Work with vendors and suppliers who report payment history to business credit bureaus. Open net 30 accounts, where you have 30 days to pay invoices and make timely payments to demonstrate your creditworthiness.
  6. Achieving Healthy Personal Credit: Getting your personal credit in a healthy place is important before applying for business credit. Aim for a credit score above 700 on all three credit bureaus and keep your credit card utilization below 30%. These benchmarks demonstrate responsible credit management and increase your chances of securing favorable business credit options. 
  7. Applying for Business Credit Cards: Research and apply for business credit cards specifically designed for small businesses. Choose cards that report to business credit bureaus and offer favorable terms and rewards. Use them responsibly, keeping balances low and making timely payments to build a positive credit history.
  8. Securing Lines of Credit: As your business credit profile strengthens, explore opportunities to connect lines of credit. Approach lenders who specialize in business credit and demonstrate a solid credit history. Use these lines of credit strategically to manage cash flow, fund growth initiatives, and establish a track record of responsible borrowing.
  9. Managing and Monitoring Your Business Credit Profile: Regularly monitor your business credit profile to ensure accuracy and identify potential issues. Review your credit reports from major business credit bureaus, address any discrepancies promptly, and stay vigilant against fraud or identity theft. Maintain good credit habits, such as making timely payments and checking credit utilization.
  10. Achieving Healthy Personal Credit: Getting your credit in a healthy place before applying for business credit is vital. Aim for a credit score above 700 on all three credit bureaus and keep your credit card utilization below 30%. These benchmarks demonstrate responsible credit management and increase your chances of securing favorable business credit options.

Note: Credit unions may offer exceptions to these personal credit score requirements if you have a business banking relationship with them. Credit unions often focus on relationship banking and consider factors beyond credit scores. Suppose you have a business banking account with a credit union and maintain consistent deposits. In that case, you can access business credit cards with lower credit scores.

Following this expanded step-by-step checklist, you can systematically build your business credit profile and increase your chances of accessing favorable financing options. Building strong business credit takes time and consistent effort. Still, the rewards of good credit scores are worth it in terms of increased access to funding, better terms, and enhanced credibility in the business world.

Best Practices for Building and Maintaining Strong Business Credit

Building and maintaining strong your business credit scores is an ongoing process that requires attention and diligence. Follow these best practices to establish and preserve a solid business credit profile:

  1. Pay Bills on Time: Timely payment of your business obligations is crucial for building a positive credit history. Pay all invoices, loans, and credit card bills on or before their due dates to demonstrate your reliability as a borrower.
  2. Monitor Your Credit Reports: Regularly review your business credit reports from major credit bureaus to ensure accuracy and identify any errors or discrepancies. Please address any issues promptly and follow up to ensure they are resolved. The best place to monitor personal credit is MyFico. Their scores are used the ones primarily used by lenders. For business credit monitoring, you can go wrong with NAV.
  3. Utilize credit Responsibly: Use your business credit cards and lines of credit wisely. Keep your credit utilization ratio low by using only a portion of your available credit. Avoid maxing out your credit limits, which can negatively impact your credit score.
  4. Diversify Your Credit Mix: Maintain a mix of different types of credit accounts, such as credit cards, lines of credit, and term loans. This demonstrates your ability to handle additional credit responsibilities and adds depth to your credit profile.
  5. Build Positive Relationships with Vendors and Suppliers: Establish strong relationships with your vendors and suppliers and make timely payments. Positive trade references from reputable suppliers can enhance your business credit profile.
  6. Communicate with Creditors: If you encounter difficulties meeting payment obligations, promptly communicate with your creditors. Inform them of any temporary financial challenges and work out a mutually beneficial solution.
  7. Keep Personal and Business Finances Separate: Maintain a clear separation between your personal and business finances. Use dedicated business bank accounts, credit cards, and other financial accounts solely for business purposes.
  8. Establish a Long Credit History: Building a long credit history demonstrates your business's stability and creditworthiness. Maintain your credit accounts responsibly over time and avoid frequently opening or closing credit lines.
  9. Update Business Information: Ensure your business information is accurate and current with credit bureaus, lenders, and vendors. Address, phone number, or legal structure changes should be promptly reported to avoid discrepancies.
  10. Seek Professional Advice: If you need clarification on certain aspects of building or managing your business credit, consider seeking guidance from financial professionals or credit counseling services. They can provide valuable insights and help you navigate the intricacies of business credit.

By following these best practices, you can establish and maintain strong business credit, opening doors to better financing options, favorable terms, and increased business growth and success opportunities.

Leveraging Business Credit for Financing and Growth

One of the key benefits of having a solid business credit profile is the ability to leverage credit strategically to achieve predictable results and drive the growth of your business. By using credit wisely and focusing on revenue-expanding opportunities, you can maximize the impact of your business credit. Here are some ideas for how to effectively leverage business credit:

  1. Acquiring Revenue-Generating Assets: Consider using business credit to purchase assets that have the potential to generate consistent cash flow, such as developing existing businesses or websites with established revenue streams. This strategic investment can provide a predictable income source and contribute to your business's growth.
  2. Expanding Product or Service Offerings: Utilize business credit to expand your product or service line, allowing you to reach a broader customer base and increase revenue. This could involve developing new products, launching additional service packages, or exploring innovative solutions to meet market demands.
  3. Investing in Marketing and Advertising: Allocate business credit towards targeted marketing and advertising campaigns designed to reach your ideal customers and drive revenue growth. This could include digital marketing initiatives, social media advertising, content creation, or other promotional strategies that can help you attract and retain customers.
  4. Scaling Operations and Infrastructure: Use business credit to invest in operational improvements and infrastructure upgrades that enable your business to handle increased demand and deliver better customer experiences. This may involve upgrading technology systems, expanding physical facilities, or enhancing logistical capabilities to support business growth.
  5. Developing Strategic Partnerships: Consider utilizing business credit to form strategic partnerships or collaborations that can open doors to new revenue streams. This could involve joint ventures, alliances, or co-marketing efforts that allow you to tap into new markets, access new customer segments, or leverage complementary resources.

Remember, the key is strategically using business credit to fund initiatives with a high potential for revenue growth and predictable returns. It's essential to assess each opportunity carefully, weighing the potential benefits against the associated risks. By using credit strategically to fuel revenue-expanding activities, you can make the most of your business credit resources and achieve sustainable growth.

Avoiding Common Mistakes in Building Business Credit

While building business credit can be a valuable asset for your small business, it's essential to be aware of common pitfalls hindering your progress. By avoiding these mistakes, you can set yourself up for success and maximize the benefits of your business credit journey. Here are some common mistakes to steer clear of:

  1. Mixing Personal and Business Finances: One of the most common mistakes is commingling personal and business finances. Maintain separate bank accounts, credit cards, and financial records for your business to establish clear boundaries and protect your personal credit.
  2. Neglecting to Monitor Your Credit: Regularly monitor your business credit reports to stay informed about your credit standing and identify any errors or discrepancies. Keeping a close eye on your credit can help you address issues promptly and maintain a strong credit profile.
  3. Overextending Your Credit: While utilizing credit to build your business is essential, be cautious not to overextend yourself. Taking on excessive debt can strain your cash flow and make it challenging to meet your financial obligations. Borrow responsibly and keep your credit utilization in check.
  4. Applying for Too Many Credit Accounts: Applying for multiple credit accounts within a short period can negatively impact your credit score. Each credit inquiry can result in a slight drop in your score. Be selective in your credit applications and only pursue opportunities that align with your business needs.
  5. Failing to Make Timely Payments: Payment history is crucial in building strong business credit. Ensure you make timely payments, meeting the due dates for all your credit accounts. Late payments can damage your credit score and make it harder to secure favorable credit terms in the future.
  6. Not Establishing Trade References: Building trade references with suppliers and vendors is essential to building business credit. These references can demonstrate your reliability as a business and contribute to a favorable credit profile. Maintain good relationships with your trade partners and request that they report your payment history to business credit bureaus.
  7. Ignoring Your Personal Credit: While business credit is essential, your personal credit can also impact your business's creditworthiness, especially for small businesses. Keep your credit in good shape by paying bills on time, managing debt responsibly, and maintaining low credit utilization.
  8. Accepting Credit Offers with Unfavorable Terms: Be cautious about getting credit offers with unfavorable terms. Some credit options, like merchant cash advances, can be costly and burdensome. Carefully review the terms and conditions of any credit offers to ensure they align with your business goals and will not hinder your ability to succeed.

By being aware of these common mistakes and taking proactive steps to avoid them, you can navigate the business credit-building process more effectively. Avecy is committed to helping you make informed decisions and providing resources to support your journey toward building strong business credit.

Resources for Further Guidance and Support

As you embark on your journey to build business credit, several valuable resources are available to provide you with further guidance and support. These resources can offer additional insights, tips, and tools to help you navigate the complexities of building and managing your business credit. Here are two recommended resources to explore:

  1. NerdWallet's Guide to Small Business Credit: NerdWallet is a trusted source of personal finance information, and they also offer a comprehensive guide specifically tailored to small business credit. Their guide covers a wide range of topics, including how to establish business credit, the best practices to maintain a strong credit profile, and tips for finding suitable credit options for your business. Visit NerdWallet's website to access their guide and take advantage of their expert advice.
  2. Nav's Tips for Establishing Business Credit: Nav is a leading provider of business credit services, and they offer valuable resources to help entrepreneurs establish and manage their business credit effectively. Their tips and articles provide practical insights into building business credit, understanding credit scores, and accessing funding opportunities. Visit Nav's website to explore their library of resources and gain valuable knowledge to support your business credit journey.

By leveraging these trusted resources, you can access expert advice, educational materials, and tools that will empower you to make informed decisions and take the necessary steps to build a strong business credit foundation.

Conclusion: Empowering Small Business Owners for Financial Success

Building and establishing business credit is crucial to achieving financial success as a small business owner. It opens doors to financing opportunities, enhances your credibility with lenders and suppliers, and strengthens your financial health. With the proper knowledge, strategies, and resources, you can navigate the business credit landscape and position your business for growth and prosperity.

At Avecy, we are dedicated to empowering small business owners like you to thrive financially. We offer a wide range of resources, including expert advice, practical tools, and a supportive community, to guide you on your journey toward building and managing business credit. Please explore our website, browse our blog, and use our comprehensive checklists to gain the knowledge and insights you need to make informed financial decisions.

Join us today and unlock the power of business credit for your small business. Together, we can navigate the financial landscape, seize opportunities, and achieve your business goals. Let Avecy be your trusted partner in your pursuit of financial success.

Frequently Asked Questions (FAQs)

Q: How long does it take to build business credit?

A: Building business credit takes time and consistency. It typically takes at least 6 to 12 months of actively using credit and making timely payments to establish a solid credit profile.

Q: Can I build business credit as a sole proprietor?

A: Yes, as a sole proprietor, you can still build business credit. However, keep in mind that your personal credit will play a significant role in the evaluation process.

Q: Do I need a business bank account to build business credit?

A: Having a separate business bank account is highly recommended for building business credit. It helps establish financial separation between your personal and business finances.

Q: Will building business credit affect my personal credit score?

A: In most cases, business credit activities do not directly impact your personal credit score. However, certain credit products may require a personal guarantee, which can affect your personal credit if not managed properly.

Q: Can I build business credit if I have bad personal credit?

A: It may be more challenging to build business credit with a low personal credit score, but it's not impossible. Focus on improving your personal credit while simultaneously building a solid business credit profile.

Q: Can I build business credit without a business credit card?

A: While having a business credit card can be beneficial for building credit, it's not the only way. Consistently making payments on trade accounts, loans, and other credit products can also contribute to building business credit.

Q: How often should I check my business credit report?

A: It is recommended to regularly monitor your business credit report at least once a year or before applying for new credit. This helps you stay informed about your credit profile and identify any errors or discrepancies that need to be addressed.

Q: Can I use my personal credit cards to build business credit?

A: Using personal credit cards for business expenses does not directly contribute to building business credit. It's best to establish separate credit accounts specifically for your business to build a strong credit profile.

Q: What happens if I default on business credit?

A: Defaulting on business credit can have severe consequences, including damaging your credit score, potential legal actions, and difficulties in securing future financing. It's crucial to responsibly manage your credit obligations to avoid default.

Q: Should I hire a professional credit building service to build business credit?

A: Hiring a professional credit building service is a personal decision. While they can offer guidance and support, it's essential to research and choose a reputable and trustworthy service provider if you decide to go this route.