Limited liability corporation is a type of business structure that separates a company from its owners’ personal and legal obligations, unlike sole proprietorships and partnerships where the line between the two is blurrier. This separation is one of the benefits for entrepreneurs to create an LLC as a business structure for their new company.
One of the challenges new business owners face is establishing their financials, along with a solid credit standing. While there are similarities, it’s important to recognize an LLC credit score works differently than it does for personal credit. In this article we’ll take a look at how LLC credit works, how an LLC can establish its credit, what factors matter in business credit scoring, and other important details you need to know about LLC credit scores.
Does an LLC have its own credit score?
Establishing a business’s credit is essential, and those who launch their company as an LLC often ask themselves the question, “Does an LLC have its own credit score?” The answer is yes.
A business credit score for LLC companies is similar to a personal credit score, except it’s designated solely for the business. This is often confusing because of the similarities between business and personal credit scores; both are three digits, each represents how well credit obligations are managed, and both types of scores are vital to getting good terms on loans and other types of credit.
The LLC credit score is independent of the business’s owner(s), but this score doesn’t come automatically. At formation, an LLC doesn’t have a credit score because it hasn’t yet initiated any financial activity. Due to this, many lenders will initially rely on an owner’s personal credit, especially early on when determining whether to approve a loan or offer a business line of credit. Over time, a business credit score for an LLC can be generated.
What is a business credit score for an LLC?
An LLC business credit score demonstrates a company’s creditworthiness to banks, lenders, and other entities that issue credit, such as vendors or suppliers. This 3-digit number will vary depending on the reporting agency, but generally speaking, the higher a score, the better. Issuers of credit will rely on this figure to determine risk and make a decision about whether to lend money to an LLC. Much like a personal credit score, business credit must be built intentionally and “from scratch”.
What credit score does an LLC start with?
So now you may be wondering, does an LLC have a credit score when you open it? The answer is no: LLCs start with no credit score or credit history, this reputation must be earned. While there are many benefits to forming an LLC, it’s not a way for a business owner to create credit, they must proactively build credit to become trustworthy to banks and other lenders.
Once credit activity is reported, then an LLC’s credit profile will appear. If you’re concerned about not having a credit score when you form your LLC, don’t worry, this is normal and expected. You can take mindful steps to build a solid credit history for your business.
How business credit for an LLC is created
Business credit is about payment behavior, not income. You’ll want to be deliberate when building credit, even if it’s not yet profitable.
Over the course of an estimated 6 months up to a few years, an LLC credit score will be established. The longer you stay in business and have a positive rating, the stronger your credit will grow. By maintaining business identity consistency, you demonstrate to lenders how you operate.
How do credit bureaus issue LLC credit scores?
It’s important to know there is not one universal score, credit is tracked and reported by 4 different credit bureaus. Scores for LLCs are structured differently depending upon the reporting agency. LLC scores are typically reported by:
- Dun & Bradstreet (1-100)
- Equifax Small Business (1–100 but also has “risk” scores which are higher than 101)
- Experian Business (1-100)
- FICO Small Business Scoring Service (0-300)
Keep in mind though, not all vendors will report activity to business credit bureaus, so not all payments may give your company “credit” for payments. This means you’ll want to diversify your credit activity by using business credit cards, taking out loans, and establishing other lines of credit; don’t rely on one source while simultaneously making sure not to inadvertently overextend your business’s ability to pay.
The role of D-U-N-S numbers in LLC business credit
A D-U-N-S Number (data universal numbering system) in LLC business credit is a unique number assigned to your company. The business reporting agency Dun & Bradstreet issues them to validate LLCs and provides a level of creditworthiness. Often you’ll need to apply for one, but sometimes they are initiated by Dun & Bradstreet. Once assigned a D-U-N-S Number, this creates a Dun & Bradstreet file.
This number isn’t a credit score and, while it can be helpful, having one may or may not be a requirement to establish credit. For example, if your LLC is pursuing federal or state contracts or small business grants or is involved in other special circumstances (e.g., your company is an Apple Developer or other situations), a D-U-N-S Number is essential. In other cases, a D-U-N-S is optional, but can be helpful in establishing a credit profile, securing loans and financing, demonstrating payment reliability with suppliers, and to show investors your creditworthiness and legitimacy.
D-U-N-S numbers are always free to obtain for U.S. businesses and, once issued, they never expire.
Business credit vs personal credit for LLC owners
Personal credit scores are directly tied to your SSN and, ideally, are separated from a business. However, banks, credit card issuers, vendors, insurance providers, and other lenders may evaluate both a personal and business credit score to evaluate financial risk, especially if the LLC is newly established and doesn’t have a strong credit history.
As the LLC builds its own creditworthiness, evaluating entities will be less likely to make its decisions based on an owner’s personal credit. LLCs operate separately from its owner’s personal finances. However, this doesn’t automatically remove personal responsibility.
To do so, owners will want to maintain complete separate finances, only sign documents as an LLC representative, obtain business insurance, avoid making personal guarantees on loans, and operate 100% as a business by not allowing “overlap” between personal activities and business operations.
How lenders actually use LLC business credit
Achieving a good credit score can open a business to numerous competitive advantages due to reduced risk perception. For instance, they may be able to afford to expand because they can secure loans with higher lending limits and better terms. A better score makes borrowing more affordable and feasible.
Preparing your LLC to build business credit responsibly
To obtain a solid credit standing for your LLC, you’ll want to focus on establishing a strong foundation and avoid “hacks” to take shortcuts. A properly formed and well-organized LLC positions the company to build strong business credit over time because credit bureaus and lenders rely on consistent business information.
The first step to building an LLC credit score is to properly and legally forming your LLC, including getting an Employer Identification Number (EIN), if one is not already secured. This will tie a credit score to the business (much like a personal credit score is tied to a Social Security Number). Other vital steps to help build a good credit score include:
- Applying for a business credit card
- Opening a business bank account (completely separate from personal finances)
- Applying for a business loan
- Applying for vendor and/or supplier accounts
- Checking to see if you have a D-U-N-S Number; if not applying to get one
- Maintaining a good credit utilization history (below 30% is best but under 10% is ideal)
- Making repeat borrowing
- Making all payments on time or, if able, aim to make them earlier early (can make the difference between “good” and “excellent” LLC credit scores)
The key to obtaining a great LLC credit score is to build consistent business information. It also helps to maintain separation between your personal and business finances.
Common misconceptions about LLC credit scores
Business credit score for LLCs often come with misunderstandings. Common misconceptions include:
- Believing an LLC has credit as soon as its legally formed
- Assuming a D-U-N-S Number equates to good credit
- Presuming business credit automatically replaces or is the same as personal credit
- Thinking business credit scores don’t matter if the business is profitable
- Believing all vendors report to credit bureaus
When establishing your LLC’s credit score, it’s essential to maintain realistic expectations. Earning a good score may take some time, even if you do everything perfectly.
Conclusion
Building credit isn’t always easy, but can be done through patience, along with thoughtful and deliberate actions. Much like personal credit, LLCs can build strong business credit over time.
If the prospect of building a solid LLC credit score is overwhelming, don’t worry, this is a common feeling for new business owners. Tailor Brands is here to help. Our team can help you establish your LLC, assist with developing brand credibility, provide business coaching, give solid advice on how to build credit, and much more.
To learn more about how Tailor Brands can support you in your journey to running a successful business, contact us today.