A small business guide to credit, why you need it, and how to get it

How do you build business credit and a business credit score? Like building your personal credit file—which you might access from credit reporting firms like Experian, TransUnion, or Equifax—it's a matter of establishing a history of paying off your credit lines on time. Here is a five-step approach to building your business credit.

Establish a separate business entity

Even if your business is a sole proprietorship, you need to establish it as an entity separate from yourself to establish business credit. That includes accessing an employer identification number (EIN), which is its own tax identification number, and opening a business banking account. You may also choose to form a limited liability company (LLC) or corporation. It's a good idea to consult your accountant about the best option for your business.

"When they start, many small businesses have trouble keeping their business finances, and personal finances separate, which can cause bad personal spending decisions to impact business credit," says Jeffrey Bumbales, director of marketing and strategic partnerships at business lending website Credibly. As you're establishing your business presence, ensure that you have at least one business credit profile. Dun & Bradstreet, Equifax, and Experian all track business credit.

Access a small credit line or loan

There are several ways you can start to build business credit. A business credit card may help if it's issued to your business and not to you, personally. However, you still may need to sign a personal guarantee, which will affect your personal credit profile.

A personal guarantee means that you agree to pay the debt if the business cannot. Such guarantees are not typically released until the loan is paid, so building a strong enough business credit profile to ensure that you don't need a personal guarantee gives you more flexibility and helps protect your personal credit, says Dennis Shirshikov, a financial analyst at business information website FitSmallBusiness.com. You may also apply for a small bank loan or line of credit in your business's name.

Opening trade credit lines can also be helpful. A trade credit line is extended by a non-bank business. Some businesses that issue trade credit report payment history to credit bureaus, building your profile as long as you pay on time.

However, even if they don't report, being able to access trade credit can be useful for cash flow management. "There are some cases where successfully financing with trade credit does get reported as invoicing history, but you can always provide proof of your trade credit relationship in addition to business credit," Shirshikov says.

Monitor your profile regularly

Be sure to check your business credit profile regularly to ensure that your timely payments are being reported and to correct any mistakes that could negatively affect your business credit.

"The earlier you catch a mistake, the easier it is to correct it and prove to financiers that there is an error," Shirshikov points out.

Use your good credit to your advantage

As you establish a strong credit history for your business, you should work on increasing your limits and gaining more favorable terms. "Business owners should constantly be working to improve their credit lines. Over time, an increased credit line allows a business owner access to greater leverage," Shirshikov says. Most lenders won't automatically review businesses for increases in credit limits, so ask for better terms or higher limits at least once a quarter, he advises.

"Keep a close eye on it and don't rush the process. A key component of credit is the time that accounts have been open as well as the relationships with financiers," Shirshikov says.