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How to Build Business Credit

By John Csiszar

All businesses need capital to survive. From startups to established businesses, capital is the grease that keeps the wheels of industry turning. Even though corporate lending is a competitive business, with plenty of options available, the nature of your business is likely to determine the type of capital you’re eligible to receive. Just like in your personal life, it takes credit to get credit in the corporate world, so it’s important to build and maintain a solid credit profile. So, what’s the best path to a good business credit score? Here’s a look at some options for six types of business profiles.

Type of Borrower Funding Type for Building Credit
Startups w/No Business Credit Startup Loan
Startups w/Bad Business Credit Merchant Cash Advance
Established Businesses With No Business Credit Equipment Finance Loan or Lease
Established Businesses With Bad Business Credit Invoice Factoring
Companies With 2-3 Years of Financials SBA Loan
Small Businesses With 5+ Years in Business SBA Loan

1. Business Credit Basics

As with your personal credit, you have multiple business credit scores from various business credit bureaus. The four business credit bureaus are:

  • Dun & Bradstreet
  • Experian
  • Equifax
  • FICO

Each of these credit bureaus uses a different credit scoring model and it’s important you understand each one. By knowing how to interpret each type of credit score, you’ll also be able to understand how to improve each one. By taking actionable steps to improve your business credit, you also take steps towards qualifying for financing, which can help you grow and sustain your business down the line when you need it most.

It’s best to get to know each of your business credit scores well — you never know who is looking at which credit score. Unlike personal credit which can only be viewed by those you allow such as a lender, your business credit can be seen by anyone willing to pay the bureau for a copy of your business credit report, including yourself (yes, you have to pay for it, too). A mistake or bad mark on one business credit score could impact your business negatively even if your other business credit scores are in good shape. Take a holistic view of your credit and regularly review all business credit reports on a semi-annual basis.

  • Dun & Bradstreet Business Credit Explained

  • Experian Business Credit Explained

  • Equifax Business Credit Explained

  • FICO SBSS Business Credit Explained

Dun & Bradstreet is a name you should get familiar with. It’s the oldest credit bureau in America and it’s the only credit bureau that exclusively handles business credit. Experian, FICO and Equifax — on the other hand — handle both personal and business credit. Dun & Bradstreet has two rating systems:

  • D&B Rating
  • D&B Paydex Score

Additionally, your D&B Rating has two components: the “rating classification” and “composite credit appraisal.” Let’s break that all down.

Your rating classification is expressed in a combination of letters and numbers to indicate a company's size based on equity or net worth. The highest rating your company can earn is 5A, indicating a net worth of $50 million or more. And the lowest rating your company can get is HH, indicating a net worth less than $5,000. The other portion of your D&B Rating is your composite credit appraisal. This measures the overall creditworthiness of a business. The highest rating a company can receive is a 1, indicating most creditworthy. The lowest rating a company can receive is a 4, indicating least creditworthy.

On top of that, your business will also receive a Dun & Bradstreet Paydex score, which is expressed as a number between 1 and 100, with a higher number indicating that your business is more likely to pay its debts on time. Your business’s D&B Paydex score evaluates various factors such as how soon your business repays its debts. Whereas your D&B Rating looks at net worth, your D&B Paydex score is a reflection of your business’s ability and history of repaying debts owed to lenders.

According to Dun & Bradstreet, an improved score can lead to positive outcomes like being able to borrow money, receiving more favorable terms from suppliers and even negotiating better payment terms.

Experian is a name you’re likely already familiar with. Both a personal and business credit bureau, Experian’s business credit scoring model is among the most simple.

Experian business credit is meant to show a company’s risk potential and is expressed numerically on a scale of 1 to 100. Higher scores indicate lower risk whereas lower scores indicate increased risk. Your score could impact your business’s ability to get a loan, qualify for favorable interest rates, get favorable business insurance premiums and even receive extended credit terms with suppliers.

According to Experian, “business credit reflects your company’s image to potential lenders and business partners.” Unlike personal credit, which can only be viewed with the permission of report holder, anyone can view your business credit for any reason so it could impact you without you even realizing it.

Equifax calculates two business credit scores that appear on its business credit reports:

  • Equifax Business Credit Risk Score: According to Equifax, “Business Credit Risk Score predicts the likelihood of a business incurring a 90 days severe delinquency or charge-off over the next 12 months. The score ranges from 101 - 992 with a lower score indicating higher risk.”
  • Equifax Business Failure Score: “Business Failure Score predicts the likelihood of a business failing through either formal or informal bankruptcy over the next 12 months. The score ranges from 1000 - 1610 with a lower score indicating higher risk,” the Equifax website reads.

Each score provides insight into how risky your business is and its likelihood to succeed or fail. This can have a direct impact on decisions made by lenders, partners, vendors or other critical business relationships.

FICO is a familiar name in the world of personal credit but it offers business credit as well. FICO SBSS, which stands for Small Business Scoring Service, has a scoring model that ranges from 0 to 300 with 300 being the best.

A higher score indicates that your business is likelier to repay a loan. Unlike the other business credit scores, FICO SBSS business credit score is based on both business and personal financial habits so your personal credit history, for better or for worse, will play a role.

2. Startups With No Business Credit

How to Build Business Credit for a Startup With No Business Credit

If you’re a startup with no business credit, you won’t likely find lenders lining up to offer you low-rate business loans. Most banks and finance companies view startups with no credit history as risky investments, as there is no financial history to suggest they can pay back their loans. Because of this, many startups turn to friends and family to find initial financing, and this is often enough to get them off the ground. However, to continue as an ongoing entity, most startups need viable business credit. At this point, alternative sources of capital can play an important role. Seek Business Capital is an example of a finance company that specifically aims to help startup companies get financing. Particularly if you have no business credit, this can be a good place to find the funding you need to start building the long-term credit profile of your company.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is a record of a company’s financial dealings. This includes its history of credit cards, loans or any other type of borrowing. Credit reporting agencies like Equifax and Experian provide credit histories for businesses, just like they do with individuals. Lenders then use your credit report as a data point in determining how risky you are as a borrower. The higher your risk profile, the less likely you are to get approved for a loan at a decent interest rate.

Dun & Bradstreet is a credit reporting agency that focuses exclusively on businesses. Although you may not have heard of Dun & Bradstreet if you don’t yet have a business credit score, D&B is actually the oldest credit reporting agency in the country.

D&B’s system of assessing the creditworthiness of companies consists of two elements, the D&B Paydex Score and the D&B Rating.

The D&B Paydex Score is somewhat akin to a personal credit score. However, unlike the 300 to 850 scale that you might be used to in terms of your personal credit score, D&B reports business credit using a scale from 0 to 100. Your company’s net worth is meaningless for this score; all that matters is how you handle your corporate finances, such as how quickly you pay back your lenders. To get a D&B Score, you must register with D&B and get a D-U-N-S number, which is a unique, nine-digit number assigned to your company.

The D&B Rating consists of two elements: Rating Classification and Composite Credit Appraisal. Unlike with the D&B Paydex Score, your company’s net equity does play a role in your Rating Classification. For example, to get the highest rating of 5A, your company must have a net worth of $50 million or more. The lowest rating, HH, is assigned to companies with a net worth of under $5,000. For the Composite Credit Appraisal, companies are ranked from 1 to 4 based on their overall creditworthiness. The most creditworthy companies are assigned a value of 1, while the least creditworthy earn the 4 designation. You cannot score above a rating of 2 unless you submit your company’s financials directly to Dun & Bradstreet.

Just as with your personal credit score, if you want to establish business credit, you’ll have to borrow some money. You can start by opening a business bank account and business loan accounts. Your business credit report will show all of the accounts that you open, from credit cards and lines of credit to merchant cash advance transactions and term loans. The process, from corporate formation through to establishing good credit, should look something like this:

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

These steps will ensure you begin building a credit profile for your business.

Companies like Seek Business Capital typically set up borrowers with term loans. A term loan traditionally comes with a set maturity date and a fixed rate of interest. However, the specific term of any loan can vary greatly based on the individual lender and the needs of the borrower. For example, you can set up a short-term loan, a medium-term loan or a long-term loan, although many lenders won’t take the risk of a long-term loan with a startup with no business credit.

Loan interest rates are a reflection of perceived risk. Lenders set rates in relation to the risk that they might not be paid back in full. As a startup with no credit history, your perceived risk will likely be high, as you haven’t yet demonstrated that you can pay back a loan. Thus, interest rates for startups with no credit history are usually high. That’s why it’s so important to begin building your business credit as soon as you can after company formation. Since it takes credit to build credit, your first option may always be a bit expensive. For a true startup with no business credit, you can generally expect rates to run in the double digits. However, with the right finance company, you can still find rates lower than with other options, such as opening a business credit card. You may even be able to get a 0% APY promotional rate from companies like Seek Business Capital to get your startup up and running.

3. Startups With Bad Business Credit

How to Build Business Credit for Startups With Bad Business Credit

If you have a startup business and you already have bad credit, you’re in an unfavorable position when it comes to borrowing money. Startups by themselves can have trouble getting corporate financing, simply due to the fact that they have no credit history. If you’ve already managed to get bad credit as a startup, you might find that your financing options are extremely limited. In this case, one of your only options for starting to rebuild your credit may be a merchant cash advance.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is a reflection of a company’s financial capacity to pay. Any type of loan you take out, from credit cards to term loans and beyond, will appear on your business credit report. Credit reporting agencies like Experian and Equifax collect all of this financial information and present it in a report that lenders can review. Based on the information in your business credit report and other financial metrics, lenders make a determination as to your risk as a borrower. If your credit report shows a history of financial misdeeds, you’re less likely to get approved for a loan at an acceptable interest rate.

Dun & Bradstreet is a credit reporting agency, like Experian or Equifax. However, D&B focuses exclusively on businesses. Two factors comprise the Dun & Bradstreet system for assessing corporate creditworthiness: the D&B Paydex Score and the D&B Rating.

The D&B Paydex Score operates like a personal credit score. However,Paydex Score scale runs from 0 to 100, rather than the 300 to 850 commonly found with personal credit scores. Although a lot of work goes into creating this score, essentially the range reflects how well you handle your corporate finances. If you have a history of successfully paying back lenders in a timely fashion, your score will be closer to the top of that range. Unfortunately, if you’re a startup with bad business credit, your score probably will not be that high. The good news is that you can use this score as a baseline to see how your credit improves over time.

If you’re trying to build up your D&B Score, you’ll need to register with Dun & Bradstreet and get a D-U-N-S number, which is a nine-digit number assigned to your company alone. This is a good first step in trying to build your business credit.

The D&B Rating is broken down into two elements: Rating Classification and Composite Credit Appraisal. The Rating Classification uses your company’s net equity. To get the highest rating of 5A, your business must have a net worth of at least $50 million. The lowest rating, HH, is reserved for companies with a net worth of under $5,000.

For the Composite Credit Appraisal, companies are ranked from 1 to 4 based on their overall creditworthiness. Companies with the best credit records earn a value of 1, while companies with the poorest credit are assigned a score of 4. Note that you can’t score a 1 ranking unless you submit your company’s financials directly to Dun & Bradstreet.

There’s no way around the fact that if you want to establish business credit, you’ll have to borrow money and pay it back. If you’re a startup looking to rebuild a bad credit history, you might have to start all over at the beginning. Here are the steps towards building business credit If you’ve already got bad credit, you’ll likely have taken some of these steps already. If you’re trying to build business credit, however, you’ll need to focus on steps 4 through 7.

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

These steps will get you back on the path towards building a positive credit profile for your business.

A merchant cash advance isn’t a loan per se. Rather, companies receive cash up front and promise a percentage of future sales as payment, plus interest. This money is deducted directly from a company’s cash flow until the cash advance is paid back.

For example, your company might receive a $30,000 merchant cash advance, with the promise to pay back $35,000 over time. Every day, as sales come in, the lender takes a percentage, say 20%, of your incoming cash flow. That daily draw is taken until your $35,000 is paid off in full.

A merchant cash advance is an option often used by companies with bad credit because your credit history is not a determining factor for your qualification. As long as you have incoming sales, your lender can draw from them to get paid back before you ever even see the money.

On the plus side, a merchant cash advance is an easy way to get an immediate cash infusion without having to worry about qualifying for a traditional loan. On the downside, this type of funding requires you to cede control of your cash flow to a third party, and it often carries a high rate of interest.

Funding via a merchant cash advance is relatively easy, but that convenience comes with a price. Merchant cash advance rates are typically quite high, equating to double-digit annualized interest rates. Of course, if you’re a startup with a bad credit history, you’re not likely to find low rates no matter where you go, which makes a merchant cash advance a viable option.

Merchant cash advances don’t carry a traditional fixed interest rate, as if with a term loan. Rather, MCA’s are priced using a factor fee. Factor fees are determined by individual lenders, but typically run between 1.14 and 1.18, which translates to a mid-teens APR. Some merchant cash advance lenders tack on additional fees or offer very high factor rates, so be aware of the total costs.

Since your business already has bad credit, the quality of your incoming sales is a way to help you get the best interest rate you can on a merchant cash advance. If you can show a book of regular incoming business that is large and consistent, you may be able to negotiate a lower rate on your merchant cash advance. Still, you’ll want to work on improving your credit overall because established businesses with good credit can always get financing at a lower rate than a typical merchant cash advance.

4. Established Businesses With No Business Credit

How to Build Business Credit for Established Business With No Business Credit

If your company has made it to the “established” stage without needing financing or credit, congratulations! This means that you’ve been profitable enough to grow your business without needing outside funding. If you now need a business loan, the good news is that your record of profitability will make it easier to find a business loan than if you were a startup. However, without any credit history, you might still run into a few snags with traditional lenders. One option is to use either new or existing equipment as collateral for your loan, thereby building up your credit for future needs as well.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is a reflection of a company’s financial capacity to pay. Any type of loan you take out, from credit cards to term loans and beyond, will appear on your business credit report. Credit reporting agencies like Experian and Equifax collect all of this financial information and present it in a report that lenders can review. Based on the information in your business credit report and other financial metrics, lenders make a determination as to your risk as a borrower. If your credit report shows a history of financial misdeeds, you’re less likely to get approved for a loan at an acceptable interest rate.

You can think of Dun & Bradstreet as the Equifax or Experian of the business world. Like these two well-known businesses, Dun & Bradstreet is also a credit reporting agency. However, D&B focuses exclusively on businesses. If you’re looking to build your business credit, you’ll definitely want to learn how D&B operates.

Unlike the personal credit reporting agencies, D&B’s system of assessing the creditworthiness of businesses consists of two elements, the D&B Paydex Score and the D&B Rating.

The D&B Paydex Score assigns businesses a score from 0 to 100 based on their creditworthiness.To get a D&B Score, you must register with D&B and get a D-U-N-S number, which is a nine-digit number that uniquely identifies your company. Like a personal credit score, D&B evaluates the financial history of a business to come up with a score that allows lenders to compare businesses. The higher the score, the more likely you are to qualify for a loan. The Paydex Score can also be invaluable to companies like yours that are trying to improve their credit. By taking appropriate financial steps, you can watch your score climb over time, knowing that your efforts are paying off in terms of improving your creditworthiness.

The second leg of the D&B universe, the D&B Rating, consists of two elements: Composite Credit Appraisal and Rating Classification. The Composite Credit Appraisal consists of a ranking system from 1 to 4. Companies with the highest overall creditworthiness are assigned a value of 1, while those with the worst credit receive a 4. Note that you can’t receive a rating of 1 unless you submit your business financials directly to D&B. The Rating Classification is based solely on company net worth. Businesses with a net worth of under $5,000 receive the lowest rating of HH, while companies with a net worth of at least $50 million earn the top designation of 5A.

Before you can build your corporate credit rating, you have to establish it. As an established business, you’ve likely already taken some of these steps towards establishing business credit. However, if you don’t yet have credit, you haven’t completed them all. Here are the steps you’ll need to complete if you want to establish business credit:

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

If you focus on the last few steps of this process, particularly paying your debts on time, you will begin to build your business credit.

Using equipment as collateral for a loan reduces the risk for lenders, making them more willing to offer credit. If you’re using equipment for financing, you can either put up your existing assets as collateral or finance a new purchase. Either way, your lender will have the right to seize your equipment if you fail to make your payments.

If you’re buying new equipment, an alternative option to getting a loan is choosing a lease. You’ll get use of your new equipment for the term of the lease, but upon maturity, you’ll have to surrender the equipment back to the lender. Depending on your business model, this might be a good option.

Either way, using your assets as collateral for a loan or lease is one of the best ways to start building credit. You’re likely to qualify for this type of loan because it is collateralized by your equipment, and your equipment, if you’ve invested wisely, should help you generate revenue to help pay off your loan.

An equipment loan is a good place to start for an established business with no credit because your credit score won’t be as important in getting this type of loan. As long as you keep the amount you borrow well below the value of the equipment you’re financing, you’re likely to get a decent interest rate. This is the power of a collateralized loan. Along the way, you’ll build your credit score by making timely payments on this loan, meaning your next loan might have an even lower interest rate.

5. Established Business With Bad Business Credit

How to Build Business Credit for Established Businesses With Bad Business Credit

Business credit is usually a strong suit for established companies. But if you’ve made credit mistakes along the way, you might find that your bad business credit limits the financing you can receive going forward. Even though you’re an established business, past credit missteps can make lenders reluctant to offer financing. Although a high-rate loan is likely possible, invoice factoring might be a better option to start rebuilding credit for companies in this position.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is the lifeblood for any company looking to finance its operations. Your business credit is a record of your company’s financial capacity to pay back what it borrows. To build credit, a business has to take out loans and successfully pay them back on time. Your business credit report is a record of all of these loans. Experian, Equifax and other credit reporting agencies take this history and compile it into a report that lenders can review. This document is important because a high-risk borrower is less likely to get any business credit, and any loans that are offered will carry higher interest rates.

Dun & Bradstreet is a credit reporting agency, like Experian and Equifax. However, D&B only provides business credit reports. If you haven’t heard of D&B, it’s good to know that it is actually the oldest credit reporting agency in the country.

D&B’s uses its proprietary D&B Rating and D&B Paydex Score to analyze the creditworthiness of companies.

The D&B Rating has two components, the Rating Classification and the Composite Credit Appraisal. The top Rating Classification of 5A is reserved for companies with a net worth of at least $50 million. From there, the scale drops down to the bottom tier, HH, which is reserved for companies with a net worth of under $5,000. The Composite Credit Appraisal ranks companies on a scale from 1 to 4, with 1 being the top rating reserved for the most creditworthy companies. Companies with lower-tier credit receive a ranking of 4. Note that if you are intent on raising your credit profile to earn a 1 ranking, you’ll need to submit your company’s financials directly to Dun & Bradstreet.

The D&B Paydex Score is like a personal credit score for businesses. However, the Paydex Score uses scale from 0 to 100, rather than from 300 to 850. Company net worth doesn’t play a role in the Paydex Score. Rather, this score is all about your credit history, including how quickly you pay back your lenders. Only companies with a D-U-N-S number can receive a Paydex Score. You can get a unique, nine-digit D-U-N-S number if you register directly with D&B.

Establishing business credit is a process. If you get your paperwork in order from the beginning, it can be easier to track and improve your credit score along the way. Here’s the step-by-step process for establishing business credit for your company:

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

If you want to build your business credit, step #7 may prove to be the most important part of the process.

Invoice factoring is somewhat similar to a merchant cash advance. However, as a business you have more control over your payments with invoice factoring. Rather than having your lenders take a cut of your sales as they arrive, with invoice factoring you simply use your accounts receivable as collateral to receive your financing. Then, as your customers make payments, you use that cash to pay back your loan. Invoice factoring is a good way for a company with no credit to start building its credit file because you generally don’t need a good credit score to qualify.

As with a merchant cash advance, invoice factoring can be an expensive way to borrow money. However, these types of loans are short-term in nature, sometimes getting paid back in 30 days or less, so a high annual percentage rate might not amount to much in terms of actual interest. You can expect a monthly rate of between 1.5% and 4.5% for most invoice factoring loans. The quality and consistency of your accounts receivable will help dictate your interest rate.

6. Small Businesses With 2-3 Years in Business

How to Build Business Credit for Small Businesses With 2-3 Years in Business

Once your company has survived for at least two or three years, you’re past the startup phase but not quite in the big leagues when it comes to qualifying for major corporate credit. Many banks won’t even consider businesses that haven’t been operating for at least three years because their credit profile simply isn’t thick enough. Most prefer to see three years or more of profitability, not just operation, before they approve you for a business loan. This puts businesses at the two-to-three-year mark in something of a gray area when it comes to funding. At this point, a Small Business Administration 7(a) loan could be a great option, if you can qualify. Successfully paying off an SBA 7(a) loan can be a great way for an emerging company to build credit.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is your company’s currency when it comes to taking out loans. A company with solid business credit is in the catbird seat when it comes to borrowing money, as lenders seek out businesses with low-risk credit histories. Every loan your business takes out will be compiled into a credit report maintained by credit reporting agencies like Experian and Equifax. Lenders use this information to assess the risk involved in extending a loan to a business. If you’ve got a thin credit file, you’ll need to add some more loans to it in order to qualify for the best loans with low interest rates.

If you’re looking to build up your business credit, you should be familiar with the name Dun & Bradstreet. D&B is the oldest credit reporting agency in the country, and it focuses exclusively on businesses.

Dun & Bradstreet uses its own proprietary system to analyze and report the creditworthiness of businesses. The first element of the D&B system is the D&B Paydex Score. The D&B Paydex Score ranks the creditworthiness of companies from 0 to 100, with 100 being the top score. Once you register your business with D&B, you’ll receive a nine-digit identifier for your company known as a D-U-N-S number. The agency will then analyze your company’s credit history to come up with your Paydex Score.

The second element of the D&B system is the D&B Rating, which itself has two elements: Rating Classification and Composite Credit Appraisal. The Rating Classification is based on a company’s net worth. Businesses with a net worth of at least $50 million earn the highest rating of 5A, while the lowest rating of HH is reserved for companies with a net worth of under $5,000.

The Composite Credit Appraisal ranks companies from 1 to 4 based on their overall creditworthiness, with the most favorable rating being 1. The least creditworthy companies are assigned a rating of 4. Scores above 2 can only be earned by companies that submit their financials directly to Dun & Bradstreet.

Establishing and building business credit is a step-by-step process. Before you can apply for a loan, you’ll need to set up the framework of your business. While you’ve likely undergone some of these steps if your company has been operating for two or three years, if you want to continue to establish and build your credit, you should follow all the steps on the list.

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

These steps will help keep your company on track towards improving your credit profile.

The SBA 7(a) loan program was specifically created to help small businesses, particularly those that still can’t qualify for loans from traditional banks. Contrary to common belief, the SBA itself doesn’t fund 7(a) loans. Rather, the SBA acts as a facilitator, bringing together small businesses in need of financing with lenders that are willing to agree to the terms of the program. To entice lenders to participate, the SBA guarantees up to 85% of the value of the loans in the program. This greatly reduces the risk for lenders, who are then more likely to offer loans to businesses that they may not take on without the SBA backing. Overall, the program generates more lending, which is its reason for existing.

Of course, this guarantee doesn’t remove the risk from the entire program; rather, most of the risk is simply transferred from the lender to the SBA itself. Thus, the SBA has a series of somewhat stringent requirements to protect itself from lender default. One of those protections is that your business must have been operating for at least two or three years.

Since the SBA 7(a) loan program is so well-known and established, paying back your loan in a timely manner can do wonders for your credit report. Qualifying for a 7(a) loan and making all your payments on time are a great way for a growing company to build business credit.

The SBA provides explicit terms for its 7(a) loan program on its website. This helps take away some of the mystery about the loan application process. The SBA is particularly transparent when it comes to the maximum rates of the program, which are currently as follows:

Loans Less Than 7 Years

$0 - $25,000

Prime + 4.25%

$25,001 - $50,000

Prime + 3.25%

$50,001+

Prime + 2.25%


Loans 7 Years or Longer

$0 - $25,000

Prime + 4.75%

$25,001 - $50,000

Prime + 3.75%

$50,001+

Prime + 2.75%

These rates are usually lower than you might find from other unsecured lines of credit, particularly for a newer company without an extensive credit history.

7. Small Businesses With 5+ Years in Business

How to Build Business Credit for Small Businesses With 5+ Years in Business

If your business has at least five years of operating history, it likely means you have a solid credit profile. This puts your company in a great position to borrow money. Companies with consistent revenue and profitability, combined with a history of repaying loans, are the types of customers that lenders seek out. This is the level of business credit that the other company types of this list aspire to, as you should have plenty of options when it comes to borrowing money if you’re in this position. With the ball in your court, you should try to get the most flexible and affordable loan you can get. Establishing a line of credit might be the optimal solution in this situation, as it’s a flexible way to get financing and it can add yet another gold star to your solid business report.

  • What Is Business Credit?

  • What Is a Dun & Bradstreet Rating?

  • How to Establish Business Credit

  • How Does This Type of Financing Work?

  • How Can I Get the Best Interest Rates?

Business credit is a record of how a company handles its debt obligations. As an established business, you’ve likely taken out various loans as your company has grown. Each time you borrow money, it appears on your business credit report, including your record of payment. The national credit agencies assemble all of this information so that potential lenders can get a picture of how your company has handled its loans. A solid business credit report will show no defaults, no late payments and no missteps when it comes to paying back loans.

You might be more familiar with credit reporting agencies Experian and Equifax, but Dun & Bradstreet is one of the most well-known business credit reporting agencies. In fact, D&B is the oldest credit reporting agency in the country.

Dun & Bradstreet assigns a rating to all businesses it reviews based on their creditworthiness. Two elements actually comprise the D&B Rating: Composite Credit Appraisal and Rating Classification.

The Composite Credit Appraisal assigns companies a score between 1 and 4. Companies rated 1 are the most creditworthy, while companies rated 4 are the least. Note that companies must submit their financials directly to D&B to be eligible for a rating of 1.

The Rating Classification is a simple categorization system based on a company’s net worth. Businesses must have a net worth of at least $50 million to earn the top 5A designation, while those with a net worth below $5,000 receive the lowest designation, HH.

D&B also uses a simple scale, known as the Paydex Score, to help evaluate a company’s credit. Companies are assigned a score between 0 and 100 based on their credit history, with 100 being a perfect score and 0 being the lowest score. You can only get a D&B Score if you register with the company, at which point you’ll receive a D-U-N-S number. This is a unique, nine-digit code that represents your company alone.

Establishing business credit is a process. As an established company, you’ve likely already undergone this process as you have built your business credit. However, a review of the steps involved can be helpful if you want to start up a subsidiary company or if you just want a refresher to keep you on the path to maintaining your good credit:

  1. Incorporate your business
  2. Obtain EIN
  3. Open a business bank account
  4. Apply for business credit card
  5. Open a business credit file directly with the credit reporting agencies
  6. Open business credit lines with your suppliers/vendors, and ask them to report to the agencies
  7. Pay on time, or pay early

As an established business, this list can be a good reminder that you must continually use your credit and pay back your obligations in a timely fashion to maintain your high credit rating.

A line of credit is a flexible option for business credit because you don’t need to draw on it until you need the money. Unlike with a traditional loan, in which you start making payments and incurring interest charges immediately, with a line of credit, no charges are assessed or payments made until you actually take any money.

A business line of credit works well with established businesses for two reasons. One, companies in this position likely have ample cash flow, meaning they won’t always need a fixed term loan to meet their obligations. A credit line gives businesses the flexibility to only take money when needed. Second, a business line of credit can have a very low rate of interest for qualifying companies.

One of the negatives of a line of credit is that you’ll likely have to speak to a loan officer in person to qualify. The application process for a business line of credit can be thorough, as they are often approved for larger amounts. Thus, getting a business line of credit may take longer than applying for a simple term loan online.

However, having a line of credit can add to the mix of credit that your company has. This can help your credit score over time if you continue to manage it well.

One of the many benefits of a business line of credit is that the rates can be very low. Part of the reason for this is that a business line of credit is usually only extended to a company with rock-solid financials. As an example, some banks currently offer the rate of Prime + 1.75% for well-qualified borrowers. This rate is lower than you might receive even on a loan from the Small Business Administration. If you’ve got an exceedingly strong credit profile and good negotiation skills, you might qualify for an even lower rate. In a situation like this, you can leverage your company’s strong position by shopping around and negotiating for the best available rates.

The Bottom Line

There are many different ways that you can obtain business financing for your company. From traditional term loans to lines of credit and collateralized loans, there’s a wide range of financing options available to most businesses. The type of business you have and your company’s credit profile can go a long way in determining which is your best avenue of financing. Regardless of which type of loan you want, if you continually strive to improve your business credit, you’ll find that you’ll be offered the best loans with the best rates and terms.

FAQs

If you’re considering a business loan, it can help to learn all you can about business credit in general. Here are the answers to some of the most common questions regarding business loans.

How to Build Business Credit?

Building business credit is the same for a company as it is for an individual. To establish credit, you’ll have to use these accounts and pay them off on time. The longer you can show a history of using credit and managing it successfully, the higher your business credit score should go. Things to avoid that can damage your business credit include missed payments, increasing debt levels, collections or bankruptcy. Always monitor your credit report to ensure that it is accurate.

Does Business Credit Affect Personal Credit?

Generally, business credit and personal credit are kept completely separate. This helps protect business owners from personal loss in the event of business failure. Similarly, it can protect your business if you have a bad personal credit history.

From the perspective of the credit agencies -- and lenders -- businesses are completely separate entities from individuals. They have their own financial histories and credit files. The only exception is if you provide a personal guarantee to your business loans. In that case, your personal credit is tied to your business credit, and you are personally liable for any debts that your business may incur. Generally, this isn’t the best position to be in. However, if it can help your business get needed funding at a reasonable interest rate, then it might be worth considering.

How Do I Pay for a Business Credit Report?

You can check your business credit by getting a business credit report. Generally speaking, you’ll have to pay if you want to get a business credit report. Such reports can cost $24.95 or more but are easy to obtain online. Simply search for companies offering such reports, provide your credit card information online and you can instantly have access to such reports. Some vendors do offer free business credit reports, so you might want to seek those types of services out if cost is a factor.

APR vs. Interest Rate

The difference between APR and interest rate can be confusing for some borrowers. In a nutshell, a loan’s interest rate is the amount of interest you are charged on your loan. A loan’s annual percentage rate, on the other hand, reflects the total cost of your loan, including any fees or other costs that a lender may tack on to a loan. For example, a one-year, $25,000 loan at a 6% interest rate translates to $1,500 in interest. However, if you the lender adds on an origination fee of $300, then your APR comes in at 7.2%. A loan’s APR will always be equal to or higher than its stated interest rate.

How Do I Choose a Business Lender?

There is no one business lender that is right for every company. However, if you shop around, you can find the lender that offers you the best combination of loan terms, low interest rates and business support. The weight you should give to each factor is a decision best left to individual companies.

For example, you may find one lender that offers the absolute lowest interest rates on all of its loans, which is obviously an important factor. However, if that company doesn’t offer 24/7 customer support, or has restrictive loan covenants, it may not meet your needs as a business. Choosing the most important elements of a loan provider is an important part of the business credit-seeking process.

How Can I Get a Better Interest Rate on My Business Loan?

The primary way to get a better interest rate on your business loan is to improve your credit profile. Unfortunately, credit is something that must be built up over time. The longer you can demonstrate a history of paying back your debts on time, the higher your credit score is likely to trend. This is a process that can take months, if not years.

If you are in immediate need of a better interest rate on your business loan, you can take other steps to reduce your risk profile in the eyes of potential lenders. For example, you might have to put up a large down payment or show extensive cash reserves. Providing a personal guarantee might help you get a lower interest rate as well, as long as you have a strong personal credit profile. Bear in mind, however, that this puts your own personal finances at risk in the event that your business can’t pay back its obligations.