Business Credit: How It Works and Differs from Personal Credit

Business credit is essentially what is says - a credit line intended specifically for business use. One of the easiest ways to start on the right foot when building business credit is to get vendor accounts with companies that report to commercial credit agencies. When your payments are made on time, you will build multiple solid credit references that can help to quickly and easily boost your business credit scores significantly.

What is a Net-30, Next-15, or Net-90?

A Net-15, Net-30, etc., is an account credit that allows you to buy now and pay in full (within 15 or 30 days) the full amount that the vendor has extended to you. Vendors will report these payments to commercial credit bureaus such Equifax Small Business, Experian Business, and Dun & Bradstreet at various intervals. These reports are essential for establishing strong business credit.

Vendor credit is a convenient way to get started especially when your business is young and not making much money yet. Then, depending on the credit terms of that vendor, you will be able to purchase goods or services for them later.

Some vendors provide net-15 (15 days to pay), net-30, net-60, or even net-90 day periods. You'll agree to terms they are willing to offer and establish those terms on your purchase order, so read the fine print to be sure you understand your account terms and can remain in compliance with prompt, on-time payments.

There are a few essential steps to increase your chances of getting approved for business credit.

You will either need to incorporate your business or register with a Secretary of State if you decide to be a sole proprietor. It's also important to have your business account set up and running to pay for your business expenses and utilize a business email address.

To qualify for a NET 30 business account, your business must:

  1. Operate in the United States
  2. Must have a Tax ID # (EIN) and DUNS (D-U-N-S) number. Your DUNS number is a unique nine-character number used to identify your company
  3. Be established for at least 30 days
  4. Not have any derogatory business reporting items
  5. Have an Authorized Agent apply on behalf of the organization

Most vendors will let you purchase items and pay them off in full by the due date on vendor invoices to avoid accumulating interest on purchased products.

Also, credit limits extended to you typically do not appear on these business credit reports. Instead, the highest recent balance will be reported. So if you spend a minimal amount, you may not see the same impact as you will if you make larger purchases. But don't be fooled and be sure to only purchase what you need and can afford. Attempting to increase your business' credit by making large purchases can be risky - always weight the risk and move forward at a safe and confident pace. Good growth will come with time.

Note that your business credit accounts will report as "business type" and will not report the names of your creditors. Nor will those accounts necessarily appear on all the major business credit bureaus.

Boosting Your Business' Credit Score

To ensure optimum performance in regard to business credit, you should pay for your purchases early whenever possible. It may take a few days or even longer to process payments to vendors, especially if you pay by mail. For this reason, it's important to leave an extra week for your payment to arrive to the vendor, get processed, and have it reported on time since late payments can and will have a negative impact.

You should confirm with the vendor that the account will be reported with at least one of the three business credit reporting bureaus. Be sure to keep an eye on your business credit report since it can take up to a few months before your new accounts appear. If they don't appear in your payment history by the third month after you've opened it, contact the vendor to verify that it's correctly associated with your business and being reported as such.

Please also note that new accounts sometimes have the effect of lowering business credit scores. However, the drop is usually only temporary and nothing to be concerned about. Most business owners will naturally see a consistent positive impact as they continually pay their accounts on time.

Just like personal credit, to establish a solid business credit profile you need to demonstrate and maintain good business creditworthiness. Pay on time, don't utilize all the credit extended to you, and keep your credit utilization low. Following these basic rules will increase your chances of qualifying for bigger and better business credit loans down the road as your business continues to grow and the need for more credit arises.