Building Business Credit

Intro

Building business credit for a new LLC involves a structured process that generally takes 6–12 months of consistent activity. This creates a distinct credit profile separate from personal credit, demonstrating your business's financial reliability to lenders.

Banks typically assess elements like business credit score (e.g., Dun & Bradstreet's Paydex), payment history, revenue, and operational duration when considering credit extensions. Early on, reliance on personal credit or guarantees may be necessary, but a robust business credit history can lessen this over time.

Step 1: Legal Establishment and EIN

A new LLC begins by registering with the state through filing articles of organization and securing required licenses, establishing it as a separate legal entity crucial for independent credit building.

Following this, obtain an Employer Identification Number (EIN) from the IRS at no cost. This serves as your business's tax ID and enables activities like banking and credit applications.

Step 2: Open a Business Bank Account

Separate business finances from personal ones by establishing a dedicated checking account at a bank or credit union, used solely for business transactions.

This creates a traceable financial history that lenders can review, while preventing fund commingling that might affect taxes or credit development.

A business phone number and address (potentially virtual) further enhance perceived legitimacy.

Step 3: Get a DUNS Number

A Data Universal Numbering System (DUNS) number is acquired from Dun & Bradstreet (D&B) at no charge. This nine-digit identifier initiates a business credit file with D&B, a key bureau alongside Experian and Equifax.

Without this, credit activities may go untracked. Processing can take up to 30 days, so apply early.

Step 4: Establish Trade Lines

Build initial credit through relationships with vendors offering "net-30" payment terms, where payments are reported to business credit bureaus.

Common starting points:

• Office product suppliers (e.g., Uline, Quill)
• Fuel card issuers
• Industry-specific suppliers

Strategy: Establish 2–3 trade lines initially. Make purchases and complete payments on time or early to foster positive history. Prioritize vendors that report activity to credit bureaus.

Step 5: Apply for Business Credit Cards

With an EIN and DUNS number in place, pursue business credit cards from reporting issuers (e.g., Capital One Spark, American Express).

Best practices:

• Maintain low utilization (below 30%)
• Pay in full monthly
• Choose cards that report to business credit bureaus

This contributes to credit score improvement, though initial approvals might involve personal guarantees.

Step 6: Maintain Payment Discipline

Payment history forms the core of business credit scores. Meet all obligations—to vendors, cards, and utilities—promptly or ahead of schedule.

Key insight: The Paydex score favors payments up to 30 days early. Paying before due dates actively improves your score, not just paying on time.

Avoid negative events such as judgments, liens, or bankruptcies, as they can impair the profile long-term. Keep personal credit strong too, as banks may review it for newer entities.

Step 7: Monitor Credit Reports

Regularly examine business credit reports from D&B, Experian, and Equifax (via services like Nav or D&B Credit, some fee-based) to:

• Verify accuracy
• Dispute errors
• Confirm positive reporting

Target scores: Aim for Paydex of 80+ to improve appeal to banks.

Note: Unlike personal credit (targeting 850), business credit scoring uses different models:

• Dun & Bradstreet Paydex: 0–100
• Experian Intelliscore: 1–100
• Equifax Business Credit Risk Score: 101–992

These often emphasize payment timeliness over a broader risk profile.

Step 8: Approach Banks for Credit

After developing a strong profile—3–5 trade lines, reliable payments, and scores over 75–80—approach banks for credit lines.

What to expect:

• Start with smaller requests
• Provide financial statements
• Banks often require 1–2 years of operation or specific revenue thresholds
• Resources like the SBA's Lender Match can help identify lenders

Caution: Premature applications risk denials that could further impact scores. Build the foundation first.

Timeline Summary

Month	Action
1	Register LLC, get EIN, open bank account
1–2	Apply for DUNS number
2–3	Establish 2–3 vendor trade lines
3–4	Apply for business credit card
4–12	Build payment history, monitor reports
12+	Approach banks for credit lines

Why Specialized Loans Are Still Necessary

A common question: If a business builds good credit from the start, why are asset-based loans or growth-stage-specific term loans necessary? Couldn't a business just operate on business credit cards like an individual?

The short answer: scale, cost, and structure.

Limitations of Business Credit Cards

• Higher interest rates: 15–30% APR if balances are carried
• Lower limits: Typically $5K–$50K initially, often insufficient for major outlays
• Short-term focus: Best for everyday expenses, not strategic investments

Why Specialized Loans Fill the Gap

Asset-Based Loans (ABL):

• Unlock larger amounts based on asset value (hundreds of thousands to millions)
• Lower rates (1–5% above prime)
• Revolving structure grows with your business

Growth-Stage Term Loans:

• Structured for big projects (equipment, real estate)
• Lower fixed rates and longer terms
• Predictable payments that match asset useful life

The Real Answer

Even with excellent credit, businesses operate on a larger scope than individuals. Needs for substantial capital investments, working capital management, or seasonal fluctuations exceed what cards can optimally address.

Credit cards are a starting point and ongoing tool for operational expenses. Specialized loans are for strategic growth.

Why Banks Don't Always Do ABL

You might wonder: if ABL is so stable, why don't traditional banks dominate this space?

Many banks do offer ABL products, but they've ceded ground to independent ABL providers and private credit firms due to:

Stricter Regulations: Post-2008 reforms raised capital reserves for riskier loans, making some ABL less profitable for banks.

Risk Aversion: Banks have become more conservative, prioritizing stable cash flows and long business histories over asset collateral.

Market Shifts: Private credit has exploded, with non-bank ABL providers filling voids left by banks' pullback.

Competitive Dynamics: ABLs offer faster approvals and more adaptable structures, appealing to businesses in flux.

This isn't necessarily bad—it allows banks to maintain healthier portfolios while specialized lenders serve growth-stage businesses with appropriate risk tolerance.