Do business credit cards build credit? They can if you use them strategically. They're one of many ways emerging businesses can establish a credit history. But what about when you're first starting out?
When starting a new business, it might be tempting to tap your personal credit to fuel operations. The early stages of a business, however, are an ideal time to build your business credit profile.
Building a business credit profile can help you when you apply for business loans or credit with vendors. The practice also helps you separate your personal and business credit and create solid accounting practices for each.
In the early stages of business, you might find that you have to sign a personal guarantee for any debt incurred for your business. Guarantees like this mean that you’ll be personally responsible for the debt should your business fail to pay it back. As you build your business credit, these personal guarantees typically fall to the wayside as your business credit stands on its own.
To help you get a smart start on building your business credit, here are five actions you can take to build credit in your business’ name.
1. Incorporate your business.
To build a credit file as a business, you need your business recognized as a business by business credit bureaus and the IRS. That means you need a legally-recognized corporate business entity, a business address and a business phone number.
Pros of Incorporating Your Business
- You’ll be eligible for an Employer Identification Number (EIN) from the IRS. This is akin to a Social Security Number for businesses.
- You’ll build a separate credit file under a business-affiliated number. This allows you to build business credit separate from your personal credit.
- You can apply for credit using your EIN. This includes secured business credit cards and small business credit cards to build credit.
- You can open a business bank account. It’s important to pay your business bills using your business bank account.
Cons of Incorporating Your Business
- Additional costs. While there’s no cost to apply for an EIN, there are state-level costs to incorporating your business entity.
- Additional tax returns. Instead of just a Schedule C, you’ll need to file corporate tax returns, which adds another logistical step to your business accounting.
2. Apply for your Dun & Bradstreet (DUNS) Number.
The three main credit bureaus that track business credit are Dun & Bradstreet, Experian and Equifax. While many vendors and card issuers will use your EIN to report your credit, many use a unique number from Dun & Bradstreet as well.
Pros of Getting Your Dun & Bradstreet (DUNS) Number
- It’s convenient and free. When using the standard request process, you’ll usually receive your number in less than 30 days and at no cost.
- You’ll be ready for all vendors. As with consumer credit, not all vendors report to all bureaus. With your DUNS number, you’ll be ready when a new vendor requests it and begin to build credit at this essential business credit bureau.
- You’ll be ready for lenders. Many lenders use D&B’s Live Business Identity when deciding whether to grant business loans. Building and maintaining your D&B credit file could boost your loan application down the line.
Cons of Getting Your Dun & Bradstreet (DUNS) Number
- Time and cost. If you need your number faster than 30 days, you’ll have to pay. Five-day service is $49. Same-day numbers can be issued and can cost between $299-$799.
- Multiple files to track. In addition to tracking your Experian and Equifax business reports, you’ll also have to track a third business credit file. This can be time consuming.
3. Apply for a small business credit card.
Do business credit cards build credit? They do if you apply for them using your EIN. By using small business credit cards to build credit, you can establish a good payment history that is reported to at least one, if not multiple business credit bureaus.
Pros of a Small Business Credit Card
- Expand your cash flow. With new purchasing power, you can have access to financing that can fuel your company’s growth.
- Manage your employees' expenses. If you have multiple employees, small business credit cards can help streamline your bills. You can possibly receive both you and your employee spending on a single bill each month.
- Earn rewards. Many small business credit cards come complete with robust reward programs, including statement credits, travel, gift cards and merchandise.
Cons of a Small Business Credit Card
- Additional oversight. If you have more than one employee with a credit card, you’ll need to establish rules for use and beef-up your accounting practices.
- Potential for misuse. Even with clear guidelines in place, employees could misuse their cards for personal expenses. You’ll need procedures to handle unauthorized charges.
4. Apply for a secured business credit card.
Do business credit cards build credit? They do. Even secured ones. When using secured business credit cards to rebuild credit (or just establish your business credit), you can establish a good pay history while working your way towards unsecured credit tools in the future.
Pros to a Secured Business Credit Card
- They’re easy. To open an account, you’ll typically just need to apply and make a deposit to establish your credit line.
- They’re flexible. Increase your credit line by making an additional deposit.
- They’re reported the same as unsecured cards. Early-stage businesses can build business credit with a secured card the same as more established businesses with unsecured cards business credit cards can.
Cons to a Secured Business Credit Card
- Deposits. You’ll need to make a cash deposit to secure your credit line, potentially tying up working capital.
- Annual fees. Keep an eye on annual fees for secured credit cards. You’ll want to make sure the card benefits justify the fees.
5. Pay your monthly bills early.
When building your business credit, you’re also establishing your reputation with vendors. Paying your bills early can build goodwill and earn you potential discounts.
Pros to Paying Your Bills Early
- You’ll establish goodwill. Vendors are likely to be more flexible with customers who pay their bills early or on time.
- You could earn discounts. Many vendors are happy to extend discounts for customers willing to pay early. Money saved means you'll have more money to put back into your business.
- You’ll avoid late fees. Paying your bills early keeps your good pay history intact and helps build a solid business credit history. You’ll also skip costly fees and dings to your credit from missed payments.
Cons to Paying Your Bills Early
- Decreased cash flow. The sooner you spend money, the sooner it's gone each month, which detracts from your purchasing power. This might leave you with less cash available and needing to tap into credit to finance unexpected business expenses.
- Missed interest. If you have an interest-bearing business checking account, you could be losing out on interest by paying bills before their due date.
By using small business credit cards to build credit, you can establish a good payment history that is reported to at least one, if not multiple business credit bureaus.
So, what's the answer -- do business credit cards help build credit? They do, along with the additional strategies outlined above. Keep in mind that, as with your personal credit, it takes time to build a business credit profile. By using the steps above, you're getting your business credit ready for when you need a loan or line of credit in the future. There’s no time like the present to get a head start.
Read more articles on credit-card financing.
Photo: Getty Images
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.