Building business credit is just as important as building and taking good care of one’s personal credit.
In the business world, a company does not have a consumer FICO® Score. Instead, it has business credit scores, ratings maintained and calculated by business credit reporting agencies.
“Just as your personal credit has a big impact on your financial health, your business credit can help you get competitive business loan rates and terms from potential suppliers,” says Marc Kirshbaum, president of Experian’s Business Information Solutions group.
Unfortunately, many small business owners don’t even know there is such a thing as a credit score for a business and therefore lose opportunities to improve their own, says Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp.
Many times, small business owners make the mistake of assuming that positive personal credit scores will be enough to obtain good business credit ratings. While lenders and suppliers may initially consider personal credit history, once a business pays its first invoice, it will begin building its own credit history.
Did you know that there is such a thing called a business credit report?
Similar to consumer credit reporting agencies, there are a few major business credit reporting agencies collecting information about businesses. Most notably: Dun & Bradstreet, Experian Business, and Equifax Small Business. Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp. says, “Today, it takes a very proactive approach to building a strong credit score for your business.”
Here are five reasons small business owners should start building business credit today:
Business Financing: Lenders and suppliers use business credit reports to assess the creditworthiness of a business. According to Creditera, in the first 6 months of 2013, Dun & Bradstreet had 45 million business credit report requests and Equifax Commercial had 35 million. If a company’s business credit ratings are high, lenders and suppliers will give favorable terms to purchase on credit. If a business does not have a business credit rating or report, a supplier may require you to pay cash on delivery or ask you to personally guarantee the business purchases.
Supplier Contracts: If a company wants to do business with government agencies or Fortune 500 companies, chances are they will review your business credit reports. For example, one of the steps required in order to register as a Federal Contractor is to obtain a Dun & Bradstreet D-U-N-S® Number. Government and large corporations review business credit scores and reports to make sure their suppliers are reliable and pay their invoices in a timely manner.
Business Separation: Business owners have the unique opportunity to build, maintain and obtain credit both individually and as a business owner. As a business applies for and receives credit, a business credit report will be established. This enables a complete separation between the personal credit reports of the business owner to the reports established by the company itself. In addition, having separate lines of business credit makes it easier to keep business expenses separate from your personal expenses.
Credit Protection: With favorable business credit ratings, a business can obtain financing from companies willing to grant credit without a personal credit check or guarantor. This allows a business to acquire products and services it needs on credit without putting the business owner’s personal credit at risk.
Business Partners: Business credit reports are frequently being pulled by potential business partners so they can find out about a company’s credit history and decide if the business is capable of being a sound business partner. Unlike personal credit reports, business credit reports are available to the public, and anyone – including potential lenders and suppliers – can view your company’s reports. This makes it imperative to also monitor your files on a regular basis.
According to the 2012 NSBA Small Business Access to Capital Study, 20% of small business loans are denied due to business credit. As a small business owner it is extremely beneficial to start the business credit building process so you can maximize your company’s funding potential.
A statistically derived algorithm designed to determine risk based on multiple factors calculates your scores. Although each business credit-reporting agency utilizes its own scoring model there are several common factors that are used to calculate your business credit scores.
Here are 5 ways to improve your business credit scores and ratings:
1. Make Prompt Payments
The promptness with which a company pays its bills is one of the driving factors that impact business credit ratings. For maximum impact, pay invoices ahead of the due date. The greater the number of days a company pays sooner than terms the greater the impact it will have on its business credit scores. For example, a business that pays its bills promptly will have an 80 D&B Paydex® Score, while another company that pays 30 days sooner than terms may have a 100 D&B Paydex® Score.
2. Add Positive Trade References
Adding positive payment experiences that your company has with suppliers, vendors, or business partners may have a positive impact to your business credit ratings and scores. Although not all vendors and suppliers share payment data with a business credit-reporting agency; you have the opportunity to add trade references to your company’s Dun & Bradstreet (D&B) credit file.
Did you know the number of trade references reporting on your business credit report is what generates a business credit rating? For example, it takes a minimum of three trade references to generate a Paydex® Score with Dun & Bradstreet.
3. Improve Your Credit Utilization Ratio
A company’s credit utilization ratio is one of the important factors credit scoring models use to calculate business credit ratings. Lenders view a business with a high utilization rate as a greater risk of not being able to repay its debts. Work to keep your credit utilization low, preferably under 30%, is a good number to shoot for. The fact is lenders want to see that your company can properly manage its debts. Low credit utilization ratio may cause a lender to be more willing to extend credit because there is much less credit risk.
4. Increase Your Credit Limit
Of the various ways you can improve your business credit scores, increasing your credit limits is one strategy you can implement immediately. Usually after the first six months of opening a credit account you can request a credit limit increase. Keep in mind, some card issuers do periodic reviews to determine whether or not a customer should get an automatic increase. You can either request a credit limit increase online or by phone. An increase in credit availability lowers your credit utilization ratio, which ultimately improves your business credit ratings.
5. Keep Your Business Profile Up-to-Date
Similar to a personal resume you use to apply for a job, your business profile is the resume you use to apply for credit. Not only does your business profile contain your company’s banking and payment data, it also contains critical information that other businesses, suppliers, and lenders use when deciding whether to extend credit to your company and on what terms.
No one knows your business better than you so it’s essential that your profile is accurate. Information such as the number of years you have been in business, number of employees, and gross annual sale should always be up to date.
Improving your business credit scores and ratings is one of the most important steps you can take as a small business owner. Doing so will enable your business to maximize its funding potential and obtain the most favorable terms possible.
Once your credit improves, which we are happy to assist with, we will introduce your business to a local bank that can lower your capital costs.