How to establish & build business credit in 2023

A 2022 survey shows financing approval rates were considerably lower than pre-pandemic levels, with approval rates declining for the second consecutive year. 2023 has proven to be even more challenging to access venture capital funding, so it's vital to establish and build business credit as early as possible if you own or operate a business.

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

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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 take a look at keeping your business credit strong and in good standing so you can take advantage of every opportunity to secure the best financing options.

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Why building business credit is critical

According to statistics from the Federal Reserve in 2022, nearly 40% of businesses that applied for financing in 2020 didn't get the funds they needed to grow. This is often due to insufficient or poor credit history, which can be a major roadblock for businesses seeking financing, no matter the amount.

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Having strong business credit improves your chances of being approved for any financing, as lenders will want to know that you can repay them on time. Having good business credit indicates to lenders that you have a track record of sound financial management. If you can prove this to lenders, they will consider your business to be a lower-risk investment to their institution, which will likely get you approved for your financing, potentially at better rates.

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Building business credit can have a positive and lasting 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:

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Easier access to capital

When potential investors such as venture capitalists and angel investors see that a business has established good credit, they are far more likely to invest in the company. As your business grows, you'll likely need more funds to cover expenses. Having a good credit rating will make financing more accessible, and 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 and business reputation

Good credit will help you secure financing quickly and manage cash flow better, as it can give your business an influx of cash during economic downturns if necessary. This is especially important for businesses with seasonal sales or those that need to purchase inventory to meet customer demand as your business grows.

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When other businesses and investors see that your company has good credit, 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.

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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 since you're going to them as a true business, and not as just a person.

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 various 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. When you pay on time, you 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. There are a few credit bureaus that are known as the "major credit bureaus", and those are Dun & Bradstreet, Experian, and Equifax. It's important to research the vendors you're considering doing business with to ensure they report payment information to these major bureaus 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, which is 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 and creditworthiness.

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 such as once per quarter.

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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.

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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, you or your employees can make purchases up to a specific limit, and you can track spending so you can stay on top of your budget.

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If you're currently looking for a corporate card for your business, 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.

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Another reason that having a good relationship with your lender could benefit your business is that if you're unable to make a full or partial payment, you might be able to receive some form of payment accommodation. This obviously shouldn't be a regular occurrence for you, but if you find yourself financially stuck, a good relationship could go a long way for you and your company.

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10. Keep your accounts open

Just like with personal credit accounts, having older accounts open longer can help boost your credit score. Accounts with longer histories are looked upon more favorably, so you want to keep accounts open for as long as possible.

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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. Just 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 score, 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.

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It can take a business up to three years to build a strong credit profile and score. If you're just getting started, it's important to know that 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.

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In the short term, applying for financing or taking on debt may help to increase your company's credit score. However, 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 difference 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.

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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, and can also help you build better spending habits for your business, as charge cards force you to not overspend since the bill doesn't carry over like it does on credit cards.

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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.

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To calculate your credit utilization, you take your total balance and divide it by your total credit limit, as shown below:

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Credit Utilization = Total Balance/Total Credit Limit

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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. Consistently having a lower credit utilization is usually better, but keeping it under 30% is the best way to keep a higher credit score.

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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.  

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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.

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

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