Credit foundations: the practical version

Business credit is not a business-shaped version of personal credit. It is a separate system, with different participants, different rules about who may look, and different protections. The differences are structural rather than cosmetic.

What to take away

Five differences that matter

The third row surprises people most. Treat your business file as something a

The Fair Credit Reporting Act (FCRA) governs consumer reports about individuals, and its disputes process does not simply extend to business credit files.

For an error on your personal consumer report, the FCRA gives you a process to dispute inaccurate or incomplete information with the consumer reporting agency. The Consumer Financial Protection Bureau's guidance explains how to start, and the Federal Trade Commission explains consumer reporting rights. For a business file, use the business-reporting agency's stated dispute process instead. Do not treat a vendor's summary as a substitute for the bureau's instructions.

What has to exist before a file can start

A file forms around an entity that data can attach to. That requires a small

amount of groundwork, and doing it inconsistently is the most common self-inflicted problem in the first year.

For a Dun and Bradstreet file, the identifier to check is the D-U-N-S Number. Request a D-U-N-S Number directly from Dun and Bradstreet, then make sure the legal business name and address match your other records. A D-U-N-S Number is distinct from the EIN; having one does not replace the other.

That last point is the one worth being obsessive about. Each bureau matches incoming records to a business using its own name-and-address logic. Write your address one way on a lease and another way on a supplier application and you can seed two partial records, so the history you built lands on one and the lender pulls the other.

Pick the exact form that appears on your registration documents. Use it without variation on applications, supplier accounts, invoices, utilities, leases and insurance. It is tedious and it does more for your file in the first year than anything else available to you.

Reporting is voluntary

This is the fact that reorganizes everything else. A supplier who has given you terms for years may never have sent a single line to any bureau. Paying them promptly earned you goodwill with that supplier and nothing more.

Before opening an account, ask whether the terms are good. Also ask whether the creditor reports and to which bureaus. Put the question in writing to someone who knows, not the sales line, and keep the answer.

Ask again occasionally. Reporting practices change, and nobody will tell you when they do.

The corollary is that a thin file is not evidence that you have handled credit badly. It is frequently evidence that your suppliers do not report.

A tradeline is a credit account reported in a file. A vendor tradeline is a supplier account reported under the business's identity; paying it on time can contribute to a business file only if that supplier reports to the bureau holding the file. Ask which bureau receives the reporting and verify that the supplier uses the same legal name and address as your file.

An authorized-user tradeline usually refers to an individual being added to another person's credit-card account; whether it appears on the individual's consumer report depends on the issuer's reporting. That is different from a vendor account reported under your business's identity, so it does not by itself establish a business tradeline.

Business credit scores do not use one universal scale. Named examples include Dun and Bradstreet PAYDEX, Experian Intelliscore Plus, and Equifax business risk scores. Models and ranges differ, so check which model a creditor uses rather than comparing scores across agencies as though they were interchangeable.

The personal guarantee

Separating yourself from the business is the point of the exercise, and a

personal guarantee reverses it on a single line of an application.

Before you sign anything, ask: Is a guarantee required? Does it cover the whole obligation or part? Does it survive the account being closed? Can it be released later on conditions the document actually states?

Guarantees are common for a young business. Declining to sign one may mean no account. Make that decision knowingly, not after you discover it.

Where a guarantee exists, the account can affect you personally as well as the business. Two systems, one signature.

What to do first, in order

Most of the money wasted in this area is spent by people who skipped step four. It is difficult to improve a file you have never read, and reasonably common to discover that the real problem is a duplicate record or an error rather than an absence of history.

What to be skeptical of

Anyone quoting a specific number that produces a specific outcome is describing a lender's internal policy they cannot see. Lenders and suppliers apply their own rules on top of whatever they pull, and those rules are not published.

Be more skeptical still of anything sold as a shortcut to history. Age of accounts cannot be manufactured, which is exactly why a market exists claiming to sell it, and much of that market shades into misrepresenting your position to a lender. The slow route is slow. It is also the only one that belongs to you.

Two neutral starting points, neither with anything to sell you. The SBA's guidance on establishing business credit lays out the same sequence without quoting a number.

The IRS explains how to obtain an employer identification number directly and at no charge. Know this before anyone offers to get one for you. Apply through the IRS's online EIN application if eligible, or use Form SS-4 and follow the IRS's instructions for filing it.

Common questions

Do I need a separate entity to build business credit?

An entity is what the file attaches to, so a sole proprietor operating under a personal name has very little for a business file to form around. Whether to form one is a legal and tax question worth asking a professional about rather than deciding from an article.

Will paying my suppliers early improve my file?

Only for suppliers that report, and only in the way that particular bureau scores what it receives. For everyone else it buys goodwill with that supplier, which has its own value and is not a credit outcome.

How long does it take?

Longer than the marketing suggests, because the components that carry weight include how long accounts have existed, and that only accrues. Set the groundwork now so the clock is running while you do other things.

Should I pay a service to build this for me?

Read what the file already says before paying anyone anything. Much of what such services do is the identity and consistency work described above, which is free and takes an afternoon, and some of what they do is worth avoiding entirely.

Where can I check a business credit file directly?

In the United States the main business credit reporting agencies are Dun and Bradstreet, Experian and Equifax. Each publishes its own process for requesting your file. Request from each agency directly rather than through a reseller.

Does it matter which state or jurisdiction I register in?

It matters for tax, filing obligations and cost, and those consequences belong with an accountant rather than with a page like this. What matters for a file is narrower: that whatever you chose is recorded consistently everywhere afterwards.

My business has traded for years with no file. Have I lost the time?

The trading time is not recoverable as credit history, and it is worth something anyway: suppliers who will act as references, and a record of payments you can show. Start the file now and use the references in the meantime.

Who should hold the paperwork?

One person, in one place, with a second person who knows where it is. The failure mode is a folder on somebody's laptop that nobody else can find during an application, which is when it is always needed.

How often should the groundwork be revisited?

Once a year, and immediately after anything structural: a move, a name change, a new entity, a change of registered agent. Those moments are exactly when a second, partial record gets created without anybody noticing.