Credit is a key part of the financial world, and it plays a major role in how businesses grow.
For small business owners, having strong business credit can make a huge difference when it comes to getting funding, better terms with suppliers, and more.
But what is business credit, really?
How is this seemingly abstract concept different from personal credit? And if business credit is so critical to success, how can you ensure yours is in top shape?
This article will guide you through everything you need to know to understand and build good business credit for your SMB, step by step.
What Is Business Credit?
In simple terms, business credit is essentially your company’s financial reputation when it comes to borrowing and repaying debt.
Think of business credit like personal credit, but for your company. It reflects how creditworthy your business is, and it affects your ability to access things like financing, supplier agreements, and more.
Funders, suppliers and even vendors all look at your business credit to gauge how likely you are to pay on time.
As such, having good business credit can be a major asset for your business’ growth, and make a huge difference in how smoothly your company operates.
How Does Business Credit Work?
So, business credit is essentially a snapshot of how well you’ve managed your business finances and repaid debt.
But there are two other key terms that often get used interchangeably, even though they have distinct meanings:
- A business credit score is a number that reflects a company’s creditworthiness and likelihood of repaying debt. It considers factors like credit history, size, legal issues, and public records. Scores range from 0 to 100, with higher scores indicating better reliability for funders.
- A business credit report provides a detailed record of a company’s financial health—including risk scores, credit history, and outstanding debt. It also includes legal, lien, and collection information, compiled from trade creditors, public records, and financial statements.
Meanwhile, there are three main business credit bureaus—Dun & Bradstreet, Equifax, and Experian—that evaluate a company’s creditworthiness. These organizations generate credit reports and scores by considering many of the factors mentioned above.
So how do all these things work together in terms of business credit?
Let’s say Emily owns a small B&B and decides to apply for financing to expand her property. To assess Emily’s eligibility, her bank accesses a business credit report from Experian, which includes her credit history, payment habits, and outstanding debts.
Based on this information, Experian also calculates and provides Emily’s business credit score to the bank. With a solid score, Emily is approved for the loan, enabling her to invest in adding a sunroom to her establishment.
However, it’s not always as simple as that. Unfortunately, many small business owners face the challenge of low credit and aren’t aware how to improve it. We explore these challenges and provide solutions below.
Challenges When Building Business Credit
Many small business owners face significant hurdles when trying to build a business credit track record—this is normal.
First off, many entrepreneurs struggle with understanding the concept of business credit and how to build it. Many SMB owners don’t even realize their business has credit reports, let alone what’s in them. So, it can be a confusing landscape to learn about.
Some small business owners also find it difficult to keep their personal and business credit separate. Mixing the two can limit or even restrict access to business financing—instead, make sure to keep them separate.
Then there is the chicken-or-egg dilemma. To qualify for financing, businesses need a strong credit history—but without credit, it’s hard to build that track record. This often leads to low credit scores, not because of negative financial behavior, but simply due to limited data.
With low business credit, businesses struggle to access credit, and instead rely heavily on cash flow. While not inherently a bad situation, poor cash flow management can directly impact both financial health and business credit. For example, late payments or sudden expenses can lead to missed bill payments—further harming your credit and limiting growth opportunities.
Finally, the criteria for accessing financing can be quite inconsistent. What one funder considers “good credit” may not meet another funder’s requirements or standards. This creates additional confusion, leaving business owners uncertain about how to improve their chances of approval.
The Importance of Business Credit for SMBs
While challenging, business credit is still an essential parameter of your business. In other words, it’s something all SMBs must consider carefully—here’s why.
Easier Access to Working Capital
Having solid business credit makes it easier to secure quick financing when cash flow issues arise. Funders often check your credit score when you apply for financing, and a higher score will increase your chances of approval.
That’s because a good business credit score shows providers that you’re reliable with repayments. In some cases, you may even secure higher credit limits. You might also receive lower interest rates, saving your business money in the long run.
Better Terms on Vendor and Supplier Relationships
A strong business credit score can also help you secure better credit and repayment terms with partnering companies. Vendors and suppliers are more likely to offer flexible repayment structures when they view your business as financially trustworthy.
This can be especially helpful for making major purchases such as inventory or equipment, without stressing your cash flow.
Business Growth and Expansion Opportunities
When your good business credit allows you to secure higher dollar amounts, you can take on larger projects or invest in new infrastructure—positioning your company for growth.
Moreover, with easier access to capital, you can expand, hire, or launch new products.
Put simply, businesses with good credit are better prepared to seize growth opportunities as they arise, while those with poor credit may miss out on potential success.
Protect Your Personal Credit Score
Safeguarding your personal credit is essential for securing personal loans, mortgages, and even job opportunities. Using personal credit for business expenses can increase your credit utilization, ultimately bringing your credit score down.
But when you have good business credit, you don’t have to rely on your personal credit. This helps preserve the financial health for both personal and business growth.
Build Reputation and Trust
Good business credit signals to potential partners, investors, and customers that your business is financially stable and reliable. A strong credit score makes your company a trustworthy partner, fostering better relationships with clients and other businesses.
Investors prefer businesses with good credit as it shows sound financial management and lower risk. Moreover, customers also trust financially stable businesses, which can lead to increased loyalty and repeat business.
Ultimately, business credit is essential for securing financing and fostering growth. And at Bitty, we can show you how to do just that.
How To Build Business Credit
Despite the challenges small business owners commonly face, it’s not impossible to build business credit. In fact, with the proper mindset and consistency, it can be much closer than you thik.
The following strategies will guide you in improving your business credit.
Register Your Business Properly
By officially registering your business with the appropriate government agency, this signals to others that your company is a distinct entity with its own credit profile—separate from your personal finances.
The Small Business Administration (SBA) has a handy tool to help you determine where you should register your business.
The registration process will depend on where your business is located—it could be at the local, state, and/or federal levels.
Secure Your EIN and D-U-N-S Numbers
If you don’t already have one, be sure to get a federal employer identification number (EIN) from the IRS. This number acts as your business’ unique identifier, enabling others to track your business’ credit activity separately from your personal credit.
Meanwhile, you also need a Dun & Bradstreet number, referred to as the D-U-N-S Number. Many creditors around the world will ask you for this number (and sometimes also your EIN) before agreeing to issue you any funding.
Open a Business Bank Account
Opening a business bank account is yet one more step to formally separating your personal and business finances—and proving to funders that your business is well-managed as well as financially responsible.
As an added bonus, having a dedicated business account is a valuable tool for helping you organize revenue, expenses, and payments.
Pay Bills on Time
Paying your bills on time is crucial for building your business credit. Vendors, creditors, and funders take notice when you’re consistent in meeting deadlines. It shows reliability, which is key when applying for future credit.
Over time, a consistently positive payment history will work in your favor, opening doors to better financing options down the road.
Monitor and Review Your Business Credit Report
Regularly checking your business credit report is essential for staying on top of your financial health. Use it to track your credit-building progress. Plus, if you spot errors that may be bringing down your score, you can act quickly to correct them.
You can access your business credit report through any of the three main business credit bureaus we mentioned above. While some basic credit score tools are free, full reports often charge a fee.
Limit Credit Usage and Maintain Low Balances
Credit utilization—which is the ratio of credit used versus the total available—plays a key role in your business credit score. Keeping your utilization in check is essential for maintaining a healthy score.
To do so, avoid maxing out credit lines and pay down balances regularly. What is a good credit utilization ratio? Aim for under 30%. A low ratio will demonstrate that you’re managing your credit wisely.
Apply for Credit Products Strategically
While having credit helps establish a credit history, overextending too early in your business’ infancy can be risky.
So, before taking on new debt, take time to assess whether it’s truly necessary for your business. Missing payments or struggling to repay could hurt your credit, rather than helping it grow.
Build Relationships With Vendors and Suppliers
Partnering with vendors who report to credit bureaus can help you establish a strong business credit track record. When you consistently pay on time, they will share that information with the bureaus, benefiting your credit score.
Being prompt with payments not only strengthens your business relationships but can also boost your business’s creditworthiness over time.
Keep a Consistent Business Identity
Publicly inconsistent information about your business can confuse funders and credit bureaus and even delay your ability to secure financing.
So, be sure that important pieces of information like your name, address and contact details are consistent across all credit documents. Keeping everything aligned will facilitate smoother transactions and also improve your business’s credibility.
Cumulatively, these strategies can make a huge difference in your ability to establish a stronger business credit profile.
Grow Your SMB With Bitty
Put simply, business credit is essential for the growth of your small business—and by staying informed and practicing good financial habits, you can build and maintain strong business credit with relative ease.
Looking to boost your SMB’s cash flow while simultaneously building your business credit?
Revenue-based financing (RBF) provides flexible, quick access to working capital while helping you establish a consistent and positive payment history—which can reflect well on your business credit.
Ultimately, by responsibly managing RBF payments, this can increase your chances of securing larger loans, better supplier terms, and other new growth opportunities.
Ready to strengthen your business’s financial foundation? Apply for revenue-based financing through Bitty today and watch your business thrive!
