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How to build business credit

Business credit is vital for businesses that need to borrow money to grow. Building business credit is not impossible; it just takes time and dedication. here's our guide on all you need to know about building business credit.

The face of business continues to change. Even before the pandemic of 2020 hit, business market trends suggested that the growth of e-commerce would continue to be the big wave of the future. Businesses are learning to adapt to changes in the digital marketplace and stay ahead of changes by adopting the innovations of e-commerce.

As consumer spending continues to rise, businesses will have to invest to compete. This will require working capital and cash flow to purchase the software and technologies needed to survive in the digital economy. 

For those businesses without large amounts of working capital or wealthy investors -- like many small businesses and startups -- it has brought up the idea of building business credit.

Below, ZDNet has all the information you need on how to build business credit.

What is business credit?

At some point, entrepreneurs and business owners consider borrowing money. Many have not accumulated enough capital and cash to hit the ground running right out the gate when starting a business.

Business credit allows a business owner or company to borrow money to build their business, pay for the necessary purchases, or expand their business. Of course, they must pay this money back with interest.

Some businesses do get to the point where they can maintain their working operations off of profits, but most require constant cash flow -- good business credit affords this.
 
However, it isn't as simple as walking into a bank and getting large amounts of cash. Businesses must first work hard to build business credit to qualify for needed loans. It takes patience and the right knowledge to build business credit the right way.

How to build business credit the right way?

Most people are familiar with building credit for personal use -- applying for loans, purchasing homes or vehicles, or getting credit cards -- building business credit is not much different in principle. 

How to choose a business structure?

Unless you plan on being a sole proprietor, you must first establish your business as an entity separate from yourself. Not doing so leaves you open to assuming personal liability if legal issues were ever to arise. 

In addition, separating yourself from your business also brings advantages at tax time. The most common business entities are limited liability companies (LLC) and corporations.

How to register your business?

Once the proper business structure is chosen, you need to register your business and apply for a federal tax ID from the IRS -- known as an EIN. Without an EIN, you will be unable to open business bank accounts or apply for business lines of credit.

How to establish a business credit profile?

Once your business entity is filed and registered, you can begin the task of building your business credit. To establish a trusted financial reputation among lenders, you will need to have a working business credit file. 

Every lender will check your credit profile when you apply for a loan or line of credit. The lender must establish trust with the borrower, making sure money borrowed will be repaid. This is referred to as "creditworthiness." 

One way you can begin to develop this trust is by opening a business bank account. 

Begin building business credit

There are numerous business bank accounts for traditional banking and online banking. You must find one that suits your business needs. 

Consider these when choosing a business bank account:

  • Is it trusted and secure? Make sure you establish a bank account with a trusted bank, one that is registered and insured by the FDIC. As time goes on, you will also want to ensure your bank is an equal opportunity lender in good standing; all reputable banks are.

  • Explore the services and management tools. Chances are you will want to apply for a business credit card; if so, what are the APR rates? What type of management tools do they offer for business accounts?

  • Check the investment rates and maintenance fees. If you're looking to earn interest on your money, what are their APY rates? What are the required minimum balances to take advantage of those rates? Most banks have monthly maintenance fees, another factor to consider.

  • How are the help and support? New business owners will profit from a bank with professional help centers and financial advisors on-site or within reach. If you're always on the go, does the bank have an app for mobile banking?

Get a business credit card

Another way to help establish your business credit profile and build your business credit is by getting a business credit card. Business credit cards allow business owners to pay for necessary expenses without massive amounts of cash flow while also helping to build a business credit history. 

Most come with higher credit limits and bonus rewards that you won't find with personal credit cards. 

Here are a few advantages:

  • More spending for business tools: Business owners, especially startups, can use higher credit limits to invest in the necessary software and business tools they may need. Business credit cards allow you to build business credit as you boost cash flow. 

  • Protection on purchases: As opposed to cash-only purchasing methods, business credit cards often come with protection on purchases -- if lost, stolen, or damaged. 

  • Rewards and cashback: Many credit card companies offer rewards for spending, e.g. points or miles to travel. Some offer cashback bonuses after meeting certain spending thresholds.

  • Building business credit history: Perhaps the most significant advantage for our purposes is the ability to build a business credit history. It is essential to make your credit card payments on time or early to establish a trusted credit history. This will boost your business credit profile and score with credit bureaus.

Explore other forms of business credit

In addition to business credit cards, there are other ways to establish and build business credit. These include different forms such as supplier credit, vendor credits, and service or retail credits.

  • Supplier credit: Supplier credits are a great way to establish a reputation of trust with your business. Most businesses need a steady stream of supplies and inventory to maintain operation. Supplier credit is an agreement between you and a supplier allowing you to defer payment for supplies. This helps conserve working cash flow and allows you to build credit as you make your payments. 

  • Vendor credit: Like supplier credits, vendor credits allow you to purchase services (or products) from vendors with short-term financing. These payments can be made with a business credit card, allowing you additional time until profits roll in. Again, making payments before or on time is critical. 

  • Service credit: Service credits are usually the simplest form of building credit outside of business credit cards. Services providers -- internet, phone, TV, or other utility services -- allow business owners to build credit as they make service payments. 

  • Retail credit: Business owners can also establish relationships with their preferred retailers; most offer store credit cards for businesses. This is yet another avenue to build credit as payments are made. 

  • Pay early (or at least on time): Again, it is important to pay these entities on time, but preferably early. It is equally important that these entities report payments to credit bureaus. This will ensure that your business credit profile gets a boost. 

Keep building and monitoring your business credit

Once your business credit profile is established, and in good standing, you will have a better opportunity to branch out into other forms of lending -- lines of credit and business loans. 

Again, it is vitally important that these lenders report to credit bureaus so that your business credit profile and history continue to rise.

It is also essential to monitor your business credit profile to ensure your record is up to date and free of errors. Unfortunately, fraudulent activity happens, and if you are not watching your credit profile regularly, this can have a detrimental impact on your business credit.

Currently, three major companies handle business credit reporting -- Equifax, Experian, and Dun & Bradstreet. Each varies slightly in their reporting, but each offers ways to monitor your business credit score and standing and allows you to update business information if the need should arise.

Building business credit is not complicated, but it does take time and dedication. Doing so will ensure that your business is equipped and prepared for whatever the future may hold.