February 15, 2023

How to establish & build business credit in 2023

A 2022 survey shows financing approval rates across sources were considerably lower than pre-pandemic levels, with approval rates declining for the second consecutive year. In 2023, it may be even more challenging to access venture capital funding, so it's vital to establish and build business credit as early as possible.

Fortunately, there are several proactive steps that small business owners can take to help build their credit profile. A strong credit profile can open the door to more financing options and increase your chances of getting approved for a loan.

In this article, we'll discuss how to start building your business credit so you can access more favorable loan terms and interest rates in the future. We'll also discuss how to keep your business credit strong and in good standing so you can take advantage of every opportunity to secure the best financing options.

Why building business credit is critical

According to statistics from 2022, nearly 40% of businesses that applied for financing in 2020 didn't get the funds they needed to grow and thrive. This is often due to insufficient or poor credit history, which can be a major roadblock for businesses seeking alternative financing.

A strong business credit profile improves your chances of being approved for financing, as lenders will want to know that you can repay them on time. A good business credit score indicates to lenders that you have a track record of sound financial management.

Building business credit can have a lasting and positive impact on a company's future. Not only does it help demonstrate financial responsibility, but it also gives businesses more options when applying for financing. Here are just a few of the benefits that come with building business credit:

Easier access to capital

Venture capitalists and other investors are more likely to invest in businesses that have established good credit. As your business grows, you'll likely need more funds to cover expenses, and having a good credit rating will make financing more accessible.

More financing options

Having strong business credit will open up a variety of funding options for businesses, such as more traditional bank loans and lines of credit or alternative online lenders. This flexibility can be beneficial during uncertain economic times.

Improved cash flow

A good credit profile will help you secure financing quickly and manage cash flow better. This is especially important for businesses with seasonal sales or those that need to purchase inventory to meet customer demand.

Improved business reputation

When other businesses and investors see that your company has a good credit profile, it can help you build credibility and trust. This can give your business a competitive edge in the marketplace and make customers more likely to do business with you.

Increased negotiating power

A good credit score can give you leverage when negotiating contracts and pricing. This can be especially beneficial in industries where contracts are negotiated on an ongoing basis, such as professional services.

How to establish and build business credit in 10 steps

Building your business credit score is essential in ensuring your business's financial health. Here are some steps to help you get started:

1. Formalize your business structure

The first step to establishing your business credit is to form a legal entity, such as an LLC or corporation. This will help you separate your personal and business finances and give you the protection of limited liability. It also helps lenders view your business more favorably when applying for financing.

2. Apply for an Employer Identification Number (EIN)

An EIN is like a social security number for your business. Sole proprietors can apply for an EIN on the IRS website if their business is in the United States. This number is used to identify your business when filing taxes and opening accounts with lenders.

3. Open a business bank account

Opening a separate business checking account can also protect your personal finances from any legal or financial issues that may arise from your business. To open a business bank account, you'll need to provide your business's EIN, legal documents, and other information to verify your business's identity.

4. Establish credit with vendors and suppliers

Establishing credit with vendors and suppliers is one way to build your business's credit. Start by asking to be put on a net 30-day payment term instead of paying cash upfront. With a net 30-day payment term, you'll have 30 days to pay the bill after receiving an invoice. This will demonstrate your financial responsibility and may increase your chances of being approved for more significant financing in the future.

5. Partner with vendors who report to major credit bureaus

Not all vendors and suppliers report to major business credit bureaus, such as Dun & Bradstreet, Experian Business, and Equifax Small Business. It's important to research the vendors you're considering doing business with to ensure they report payment information so your credit score can improve while you build your business's credit.

6. Ensure all payments are made on time

Once you've established credit with vendors and suppliers, making all payments on time is vital to demonstrate financial responsibility. This will help build a strong payment history, one of the most critical factors in improving your business's credit score. You'll also free up available credit, which can help boost your overall credit utilization.

7. Monitor your credit reports regularly

It's necessary to monitor your business's credit reports regularly so you can quickly address any errors or inaccuracies. You should review your reports at least once a year, preferably more often.

You can order a single business credit report from one of the three major business credit reporting bureaus or opt for a package of reports to review all three simultaneously. This will help you keep track of your business's financial information and improve your credit score over time.

8. Apply for a business credit card or corporate card

Applying for a business credit card or corporate card can help you build your business credit. With a corporate card, your employees can make purchases up to a specific limit, and you can track spending so you can stay on top of your budget.

Ramp's corporate card also helps you build business credit by reporting your payments to credit bureaus. You'll also get access to expense management, tracking, analytics, and more.

9. Build a relationship with lenders

When you're ready to apply for financing, building relationships with lenders familiar with your business is crucial. A lender who knows your operations and financials will be better suited to determine if you're eligible for financing and can offer more competitive rates.

10. Keep your accounts open

Having older accounts open longer can help boost your credit score. In addition, accounts with longer histories are looked upon more favorably, so you want to keep accounts open for as long as possible.

If you're no longer using a particular credit card or loan, consider keeping it open and using it occasionally to help maintain your credit score. Make sure you pay off the balance each month so you don't incur additional interest charges.

How long does it take for a business to build a good credit score?

Many businesses strive to establish a strong credit rating, but few know the time and effort it takes. While some may be tempted to pursue quick fixes, the truth is that achieving exceptional company credit requires patience, dedication, and a concerted effort.

On average, a business can take up to three years to build a strong credit profile and score. However, companies with an established history of timely payments and responsible financial management may be able to develop their credit faster than those without any history.

In the short term, applying for financing or taking on debt may help to increase your company's credit score, but it can also have a negative impact if not managed properly. Ultimately, the best way to build business credit is by consistently making timely payments and establishing relationships with creditors who report payment information to major credit bureaus.

How charge cards help you build business credit

Understanding the fine line between credit and charge cards can become a real game-changer for your business credit score. Although they are used interchangeably, there are some critical distinctions between charge cards and regular credit cards.

Credit cards are revolving lines of credit that allow you to purchase items and pay them off over time, while charge cards require the balance to be paid in full at the end of each billing cycle. Using a charge card can help your business boost its credit score since the balance is paid on time and in full every month. This helps to demonstrate financial responsibility and can be a great way to build your business credit over time.

Credit reports will list both charge cards and credit cards. However, with business credit cards, your credit utilization can mean the difference between a good business credit score and a bad one.

Here's how you can calculate your credit utilization for your business cards:

Credit Utilization = Total Balance/Total Credit Limit

For example, if you have a credit limit of $10,000 and your total balance is $2,000, your credit utilization would be 20%. A good rule of thumb is to keep your utilization below 30%, which can help boost your business's credit score.

By keeping an eye on this ratio, you can ensure that you are using your money wisely and not overextending yourself financially. This is especially important when building a solid credit profile over time.

Build your credit and control spend with Ramp

You can ditch the hassle and headaches of traditional business credit cards by choosing Ramp.

Not only does our charge card report to the major business credit reporting agencies, but it also offers powerful spend management software to help you manage and control your spending.   

Ramp offers a different corporate credit card experience — one where spending less is the priority. Say goodbye to points and perks that encourage further expenditure, and say hello to top-notch spend management software that helps you save.

With Ramp's unique approach to corporate cards, you get smart software first and a card second. See why Ramp is the preferred business credit card solution at ramp.com. 

Learn how Ramp strengthens your finances

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Sr. Content Marketing Manager, Ramp

Stefanie Gordon is a Senior Content Marketing Manager at Ramp. A former financial journalist and content strategist, she is excited to help Ramp develop new, engaging content.

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How do I build my business credit ASAP?

Establishing business credit can be a straightforward process when you partner with vendors that report to credit agencies. Once you have an established business with an EIN and a bank account tied to your business, in addition to reliable payment practices, you can build credit relatively quickly. To maximize the visibility of your business credit, you should consider using a charge card that reports to agencies like Dun & Bradstreet, like Ramp's Business Charge Card.

Does an LLC have a credit score?

Yes, LLCs who use credit cards to purchase goods and services can build a business credit score. However, to ensure that your LLC's payments are reported to the major credit reporting agencies, it is important to establish accounts with vendors who report information to those agencies, such as Dun & Bradstreet, Experian Business, or Equifax Business.

Can I build my business credit with a credit card?

Yes, corporate credit cards from Ramp can help you build excellent business credit. By doing so, you can boost your business' borrowing power and credit profile. Using the card responsibly, making payments on time, and avoiding too much debt will contribute to a healthy credit score and good business standing.

Is there a way to build my business credit without a credit card?

While credit cards are a great way to build business credit, they are not the only option. Establishing vendor accounts with companies that report payment information to major credit bureaus is also a good strategy for building and maintaining creditworthiness.

What is the best way to get a credit card for a small business?

The best way to get a credit card for your small business is to utilize a corporate card like Ramp. This unique service reports to the major business credit reporting agencies and offers powerful features to help you manage and control your spending. With Ramp, you can enjoy a simpler, faster, and smarter alternative to traditional business credit without sacrificing quality or features.

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