Business Finance

How to Build Business Credit in 30 Days

Jun 06, 2023 • 10 min read
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      Setting up a business isn’t an easy feat. Even more difficult is finding and maintaining funding and cash flow to support day-to-day operations. 

      According to a study by the U.S. Bank, as quoted in this Business Insider article, 82% of businesses fail mainly because of poor cash management. Cash is the lifeblood of your business, and no matter what your profits are, your actual cash will be the thing that keeps your business up and running.

      Perhaps you can find funding through personal borrowings from friends or family, but not every entrepreneur has the luxury or opportunity to do the same. At this point, most businesses can only turn to business credit to secure funding from lenders and banks.

      The catch? 

      Lenders and banks generally consider your business credit before offering help—and for good reason. This article will dive into everything about building business credit in 30 days.

      What is Business Credit, and Why is It Important?

      Think of business credit as your personal credit score. 

      A better business credit score gives a company more access to funds from lenders and banks because of a good track record in availing and repaying debt.

      Like your own personal credit score range companies with good business credit scores can access more cash with lower interest rates than companies with bad credit scores. The latter group are definite red flags to lenders, as they are the ones who are most likely to repay loans late or just not pay at all.  

      How to Build Business Credit 

      Building business credit is a process, not an end goal. Good business credit is built upon years and years of good repayment track records. 

      If you’re looking into building your business credit, it should start from the moment you create your business plan. Here are steps on how to start building your business credit:

      1. Identify the Right Structure For Your Business

      To build a business credit, it is important to identify the kind of structure you would want for your business. There are three primary business structures you may want to consider:

      • Sole proprietorship
      • Partnership
      • LLC/Corporation

      The disadvantage of being a sole proprietor or a partnership in determining your business credit is that business credit is closely tied to the personal credit standing of the owner or partners. 

      Why? Because, in a sole proprietorship and partnership, owners and partners are personally liable for all the gains and losses of the business—including its debts. Therefore, when a sole owner has terrible credit standing, creditors are less likely to extend loans for your business, as well.

      On the other hand, businesses established as corporations create a separate legal entity from its managers and directors, so the company’s credit standing is separated from its owners and directors.

      “There is a term called ‘corporate veil’ for businesses established as corporations,” says Andrew Pierce, Founder of Real Estate Holding Company. “This corporate veil protects the management and the shareholders wherein they are only liable to the extent of their shareholdings, and their identities and financial standing does not legally affect the organization.”

      There are some exceptions to the corporate veil, such as a personal guarantee for a business loan or if personal and business accounts are mixed.

      2. Maintain a Separate Bank Account For Your Business

      Business owners should establish that the company is independent of the owners when trying to build good business credit. 

      Creditors will look at your business’ financial records, including the inflow and outflow of cash, and having a separate bank account solely for your operations will make the job easy for you and your creditors. 

      The better and the easier they see that your financial standing is positive and you have good cash flow management, the more trustworthy your credit standing looks and the more access you’ll have to funds. 

      Jim Pendergast, senior vice-president at altLINE Sobanco, states, “Even for sole proprietors, it is discouraged to keep personal and business finances in one account. Some credit investigators look at things at face value, and mixing personal and business accounts is a red flag for blurring the lines between personal and business liability.”

      In addition, mixing your personal and business accounts puts you in danger of mishandling your cash, spending personal finances on business expenses, and vice versa, and eventually puts you in a pinch regarding future legal documentation, money trail, and managing business tax computations.

      3. Establish Trade Lines

      The most popular form of trade line to build your business credit is net-30s, which can also be called supplier or trade credits

      The idea behind it is simple: businesses negotiate with their vendors to give them a 30-day term for payment upon delivery of goods or performance of service. When these vendors report to one of the three credit bureaus—Dun and Bradstreet, Experian, or Equifax—this will help start businesses and build business credit.

      “Net-30 terms aren’t only beneficial for buyers, but for suppliers as well,” says Gerald Lombardo, CEO of cauZmik. “Offering flexible terms, together with discounts for early payments, like 2/10 net 30 terms, gives a strong incentive for customers and also helps expand your brand and market,”

      The catch, though, is that signing up for a net-30 account requires filling out an application form and paying a small sign-up fee. Nonetheless, net-30 is similar to vendors extending you a 30-day interest-free loan, which will significantly help improve business credit when paid on time. 

      4. Keep Your Bills Paid in Full and On Time

      This remains true for personal and business credit integrity. Still, many people don’t realize how vital it is to regularly pay your bills and dues on time and in full. It prevents you from having bad business credit and saves you costs from interest and surcharges from late or nonpayment of account.

      “While many factors go into your credit score, your payment history has the biggest impact on it, accounting for 30% to 40% of the total score in the formula,” says Anthony Martin, Founder and CEO of Choice Mutual. “Paying on time and in full will not necessarily magically bump up your scores, but leaving them unpaid and delinquent will negatively affect your record.”

      5. Keep Your Personal Credit Score in Check

      Unfortunate as it may seem, yes, your personal credit score affects your business credit, especially for sole proprietors and small businesses. Vice versa, bad business credit can also negatively affect your personal credit.

      You can keep your personal credit score in check by making timely and full payments and increasing your credit utilization rate. However, there are still remedies in which you can separate personal and business credit:

      • Get a separate business credit card to use for all business expenses.
      • Incorporate your business.
      • Create a separate receipt for your business.
      • Carefully separate personal and business transactions.

      6. Regularly Check Business Credit Agencies

      Credit bureaus are only as good as the data being fed to them, so it is essential for businesses to regularly check with the credit bureaus for any discrepancies and misreporting that may have been incorrectly attributed to calculating their business credit score.

      According to Experian, checking business credit reports will give you the following:

      • Financial information
      • Credit score and risk factors
      • Banking, trade, and collection history
      • Liens, judgment, and bankruptcies

      While this data can help those extending credit, this will also help businesses monitor credit standing and contest incorrect credit report information through a Data Dispute form, which can be settled in as little as 30 days or longer for complex cases.

      Personal credit bureaus are different from business credit bureaus. For business credit bureaus in the United States, you can refer to Dun & Bradstreet, Experian, and Equifax as the three major providers of business credit reports. 

      According to Stephan Baldwin, Founder of Assisted Living, “Many people find communicating with credit bureaus daunting. However, to avoid erroneous records reflected on your account—bankruptcies, foreclosures, or late payments—which negatively impact your credit score, it is best to make sure to reach out to credit bureaus and regularly check your credit score and related information therein.”

      Wrapping Up

      Not all debts are bad, especially when these debts or loans are leveraged to the advantage of the business. Building your company’s business credit in 30 days starts from the moment you create a business plan, followed by availing of trade credits, getting separate credit cards, and making sure these accounts are paid on time.

      Building business credit is not a short-term process, but rather an accumulation of good business practices that would make you a credible and trustworthy organization to be extended access to more funding.

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