Building Business Credit
How To Build Business Credit In 6 Simple Steps
1. Register Your Business and Get an EIN
To establish a business credit file, you’ll need to first register your business with your Secretary of State. During this process, you will choose your company’s name and business structure (LLC, corporation, etc.).
After registering your business, you’ll want to request an Employer Identification Number (EIN) from the IRS. In some ways, an EIN is like a Social Security number for your business. It’s a number that the government, business credit reporting agencies and others can use to identify your company.
Registering for an EIN is easy and free. To start the process, simply visit the IRS website to determine if you’re eligible and to submit an application.
2. Get a D-U-N-S number
Once you receive an EIN, you can contact D&B to register your business and request a D-U-N-S number. A D-U-N-S number is a nine-digit identification number that D&B uses to distinguish businesses from one another.
There is no charge to register your business with D&B. However, you might have to wait up to 30 days to receive your D-U-N-S number.
3. Open Accounts With Vendors That Report Payment History
The next step in building business credit is opening accounts with creditors that will report your company’s payment history to the business credit bureaus. But there’s a catch. You might find it difficult to qualify for business financing when your company has no previous credit history established.
Vendor accounts can be a good solution in this situation. Some vendors may be willing to offer your business net-30, net-60 or even net-90 day terms even with no existing credit history.
Just remember, opening a vendor account alone isn’t enough. You want to be sure to establish credit with suppliers who report payment history to one or more of the business credit reporting agencies.
4. Get a Business Credit Card
Another way to establish business credit is to open a business credit card with a company that reports account activity to the business credit bureaus. If you have a good personal credit score, qualifying for a business credit card may be easy, even as a startup.
Business credit cards can also help you to keep your personal and business expenses separate. And you might be able to find a business credit card that offers the benefit of earning travel rewards or cash back on your company’s everyday expenses.
5. Pay Creditors On Time or Early
Paying credit obligations on time is critical if you hope to build good business credit. Some business credit scores, such as D&B’s PAYDEX Score, are based entirely on your company’s payment history.
It can be difficult—sometimes impossible—to earn a good business credit score if your business credit report is littered with late payments. On the other hand, adding positive payment experiences to your business credit report could drive your business credit score upward.
6. Keep Your Credit Profile Free of Errors
Each major credit reporting agency maintains files on millions of consumers or businesses in the U.S. The sheer volume of data that creditors and credit bureaus exchange means there’s a lot of room for error. Business identity theft can exacerbate the problem.
When credit reporting mistakes happen, they can damage your credit score on either the business or personal side. Therefore, it’s important to review all of your credit reports often (both business and personal) to make sure they are error-free.
If you discover mistakes on a credit report, you should reach out to the appropriate credit bureau to file a dispute. On the personal side, the Fair Credit Reporting Act (FCRA) requires consumer credit bureaus to investigate such claims and either verify that the disputed information is accurate or remove it within 30 days or less. Business credit bureaus will investigate disputes about credit reporting accuracy as well, even though the FCRA doesn’t apply to these organizations.
Frequently Asked Questions (FAQs)
Building a solid business credit profile can take time. If you’re aggressive in your approach, you might be able to establish some business credit history within a few months. However, it may take other business owners years to accomplish the same goal.
It’s also important to note that even if you establish business credit history rapidly, you might not be able to qualify for certain types of business loans yet. Many commercial lenders may require a company to be in business for a few years before being eligible for financing.
There is no single definition of a good business credit score for a couple of reasons. First, there are many different business credit scoring models, and each has its own credit score range.
Lenders also set their own qualification criteria where business credit scores are concerned. With U.S. Small Business Administration (SBA) loans, for example, you’ll need a minimum FICO Small Business Scoring Service (SBSS) score of 160. Online business lenders, by comparison, might not require you to have a business credit score at all—as long as your personal credit score is high enough to satisfy qualification requirements.
As a rule of thumb, the higher your business credit score, the better. Higher scores indicate lower risk. If your business appears to be a better credit risk, more lenders, creditors and vendors may be interested in working with it (and will perhaps even offer better rates in an effort to win your company’s business).
Once you register your business with your state, the IRS and D&B, you may be ready to open accounts in your company’s name. As a business without any established credit history, you may want to consider accounts that are easier to qualify for at first. Vendor accounts and business credit cards may fit into this category.
Be sure to establish accounts with lenders, creditors or vendors that report payment history to at least one of the major business credit bureaus. And, above all, it’s critical to pay your new business credit obligations on time every month.
The Three Major Credit Bureaus
Equifax, TransUnion and Experian are the three main credit bureaus in the U.S. They are the three largest nationwide providers of consumer credit reports to lenders, insurance providers, employers and other companies who use credit information to help predict risk.
Credit reporting has been around for more than 100 years, but the system has evolved over time. In the past, credit bureaus were smaller and largely localized. Yet little by little the “Big Three,” as the major credit bureaus are now known, acquired many of these smaller credit agencies and consolidated their data into larger databases.
At present, each of the three major credit bureaus maintains a database with information about approximately 220 million U.S. consumers. Whenever you apply for a loan or credit card, it’s almost a given that the lender will access at least one of your credit reports from these three companies during the application review process.
The Credit Bureaus and Your Information
Big data, as the credit reporting industry is often called, brings in big money. The credit bureaus collect information about you and sell it to others who are willing to pay for the data. The three main credit bureaus each earn billions of dollars every year selling credit information to others.
How the Credit Bureaus Get Your Information
Do you recall giving the credit bureaus permission to create a credit file about you? You shouldn’t, because that’s not how the bureaus work. Instead, many companies that you (and others) owe money willingly share details about their customers with the credit bureaus.
Companies that share data with the credit bureaus include lenders, banks, credit card issuers, collection agencies and others. Collectively, these businesses are called data furnishers. Data furnishers opt to share information with the credit bureaus for numerous reasons. One of the biggest motivators is that credit reporting gives a company’s customers extra motivation to pay their debts and to pay on time.
The bulk of the data on credit reports comes from data furnishers. Still, the credit bureaus collect information in other ways, too. With public records, like bankruptcies, the credit bureaus seek out purchase information from data aggregation companies like PACER (Public Access to Court Electronic Records) and LexisNexis.
Types of Information the Credit Bureaus Collect
The credit bureaus collect a lot of data to include on your credit report. But it ignores some details about your life as well. For example, your credit reports don’t feature criminal records, income or bank account balances.
Information that the credit bureaus collect for credit reporting purposes can generally fit into one of five categories.
Information the Credit Bureaus Collect
Category | Examples |
Personal Information | • Name (current and previous) • Addresses (current and previous) • Date of birth • Social Security number • Employer |
Collections | • Accounts sold to (or managed by) third-party debt collectors |
Public Records | • Bankruptcies • Previously included judgments and tax liens as well |
Credit Inquiries | • Details about when your credit was accessed during the last two years |
Accounts | • Credit obligations (current and previous) • Account numbers • Payment history • Current balance • Status (current, closed, past due, charged-off, etc.) • Credit limit • Date of account opening |
The reason the credit bureaus collect this information is that doing so is profitable. Other companies are willing to pay for your credit reports. Credit reports help lenders and other companies predict the risk of doing business with you. Scoring models, like FICO and VantageScore, can also use these details to calculate your credit score.
The Credit Bureaus Must Follow Federal and State Laws
You may find it frustrating that the credit bureaus are allowed to collect sensitive financial information without your permission. Yet even though these companies can gather your information and sell it to others, there are some rules in place to protect you.
At the federal level, the credit bureaus must follow the Fair Credit Reporting Act (FCRA). The FCRA exists to protect consumers and regulates what consumer reporting agencies are required to do when it comes to your information. The full text of the FCRA fills out over 100 pages, but some of the most important provisions of the act include:
- Credit Report Accuracy: Credit bureaus should only include accurate information on your credit reports. Should you discover credit reporting errors or fraud, the FCRA lets you dispute that information. When you send a credit dispute, the credit bureau must investigate your claim—usually within 30 days—and delete information that isn’t verified as accurate.
- Free Annual Credit Reports: It’s wise to review your credit reports often. A 2003 amendment to the FCRA, known as the Fair and Accurate Credit Transactions Act or FACTA, provides you free access to each of your credit reports once every 12 months. AnnualCreditReport.com is the website you need to visit to access these free reports. Until April 2021, the three major credit bureaus are voluntarily offering free weekly credit report access at this same website in response to the Coronavirus pandemic.
- Permissible Purpose: The credit bureaus can only sell your credit reports to certain entities. Lenders, insurance companies, landlords and employers (with written permission) may have “permissible purpose” to buy a copy of your report. However, someone like your ex-boyfriend or girlfriend would be out of luck.
- Freezing Your Credit Report: You have the right to freeze your credit reports as a protective measure. When a credit freeze (or security freeze) is in place, companies you don’t have a current relationship with cannot access your credit information. You must first unfreeze your report in order to grant access to your data. A 2018 amendment to the FCRA, known as the Economic Growth, Regulatory Relief and Consumer Protection Act, lets you freeze and unfreeze your reports free of charge.
- Opting Out: The credit bureaus can sell your information to certain companies for marketing purposes, even if you’re not applying for financing. If you have ever received a prescreened offer of credit or insurance in the mail, your credit data may have been sold without your knowledge. You can visit OptOutPrescreen.com or call 888-5-OPTOUT (888-567-8688) if you wish to stop sharing your credit information for marketing purposes.
In addition to the FCRA, the credit bureaus have state laws to comply with as well. For example, on top of the free annual credit reports provided by the FCRA, state law might require the credit bureaus to give you more free reports. Furthermore, in certain states, employers aren’t allowed to review your credit information as part of a background check.
Different Credit Bureaus, Different Information
If you review your credit reports from all three credit bureaus, you’ll probably come across similar information on each report. But there may be some differences as well. For example, your TransUnion credit report might show a collection account while the account is missing from Experian and Equifax.
There are many reasons why your credit reports could contain slightly different information. A few examples include:
- The credit bureaus are competitors. They do not share data with one another.
- Credit reporting is voluntary. Just because a data furnisher opts to share information with one bureau doesn’t mean it has to report information to all of them. Still, most major lenders report to all three credit bureaus.
- Consumers don’t always understand the dispute process. Someone might dispute an incorrect item with one credit bureau, but not the other two. This could potentially result in an incorrect account being deleted from just one credit report while remaining on the others.
- Dispute results can be inconsistent. Even if you dispute an inaccurate account with all three credit bureaus, your results may vary. Each bureau will conduct its own investigation. So, while a data furnisher might verify the account as accurate with one credit bureau, it could also fail to respond to another. This could lead to a disputed account remaining on one or more of your reports, but not all three.
- Your credit file might be mixed. Credit bureaus make mistakes. One such mistake is combining or mixing your credit file with someone else’s file. (This sometimes occurs with people who have similar names.) But it’s unlikely that all three credit bureaus will mix your credit files. Mixed files generally occur with just one credit bureau at a time.
Bottom Line
Whether you’re building credit for the first time, rebuilding damaged credit or trying to maintain your already good credit rating, it’s critical to understand how the credit bureaus work. The credit bureaus are important, but they don’t control every aspect of your financial life.
Credit bureaus don’t assign your credit scores. They don’t approve or deny loan applications. They don’t decide which accounts you’ll open or how you’ll manage your credit obligations either. Still, knowing what the three credit bureaus are allowed to do and which behaviors are off-limits can protect you and help you keep your credit in the best shape possible.