A Guide To Business Credit
To optimize how your business runs, consider the most efficient ways to manage your company’s cash flow. Business credit is often overlooked as a cash flow tool, but it can prove very valuable when leveraged correctly. Learn more about business credit—including what your business credit rating is and how to use it wisely—so you can utilize this financial option to achieve short-term goals and long-term success.
What is business credit?
Business credit represents how much money you can borrow based on your company’s financial history, factoring in the health of your personal credit. While personal credit is linked to an individual’s Social Security number, business credit is established separately through an Employer Identification Number (EIN) or Tax ID Number. This number is also recognized by the government as a business’ financial identity for tax-filing purposes. Understanding your business credit rating can improve your likelihood of getting approval for loans or business credit cards
Business credit is score differently than your personal credit
This score is based on a business’ history of paying bills and carrying debt as well as its industry. Personal credit (often called a FICO score) factors in more variables than commercial credit, so a business’ credit rating is generally easier to improve than an individual’s.
There is no single business credit score
Each rating agency has its own methods for calculating scores. To stay on top of your credit
rating, pull reports from all three bureaus to see where you stand. Personal FICO scores range from 300 to an impeccable 850, while business credit scores typically go from 0 to 100. Equifax and Dun & Bradstreet calculate additional scores that assess business risk.
Making your payments on time is your best bet
A top factor in maintaining good business credit is paying on time—or even better, paying early. A few late payments can rapidly lower your score, so be sure to work with creditors and vendors to get extensions if you ever need them. Tax liens and other legal judgments against you can also exert a long-term drag on your credit rating. Lower credit utilization—keeping well below your credit limits—improves your score, along with having several open accounts in good standing.
Each credit bureau is different
Each of the three bureaus that provides business credit reports has its own way of assessing your company’s creditworthiness. Because lenders may have a strong preference for one scoring system, it’s important to stay in good standing with all three. Plan to get a copy of your report from each agency, and read the details about how each score is calculated so you can be proactive about keeping your score high.
Establishing business credit
Some businesses are surprised to find that they are not even on the radar of the business credit agencies, either because they are relatively young or haven’t used much credit. Consider these steps to begin building a solid credit line for your company:
• Create a Business Entity
Obtain and incorporate a federal Employer Identification Number (EIN). Open a bank account in your company’s name, and use it to pay your business expenses. Don’t pay company bills with personal checks or credit cards.
• Get a Business Credit Card
Open up credit accounts in your company’s name and use them—but stay well below your limits. Make sure to pay the bills on time, and ideally, pay your balances in full each month.
• Establish Solid Credit Relationships
Get a DUNS number from Dun & Bradstreet to open your company’s credit file. Share that with 3–5 of your regular suppliers, and ask them to report your payment history to D&B and one of the other reporting companies.
Boosting your business credit score
If you need to raise up your business credit rating a few notches, small business finance expert Gerri Detweiler, co-author of Finance Your Own Business, offers these suggestions for improving your scores:
• Bring Your DBT to Zero
“Your “DBT” number—Days Beyond Term, or how many days you are late to pay a vendor—should be as close to zero as possible,” says Detweiler. Tighten up processes so that you’re invoicing customers promptly, and plan for seasonal ups and downs to keep adequate cash on hand.
• Monitor Your Credit Reports
“Many companies have never checked their reports, and if you haven’t, it’s pretty hard to know if there’s a mistake,” Detweiler says. At least once a year, and several months before you plan to apply for credit, check your records from the credit bureaus to ensure there’s no faulty negative information.
• Review Your Business Description for Accuracy
“Make sure the business category you’re listed under is correct,” she advises. Double-check that your company is categorized correctly, since lenders are more cautious about some industries than others.
• Guard Your Personal Credit, Too
Even if you’ve separated your business and personal finances, be aware that many issuers of small business credit cards will consider your personal credit history. Both Experian’s Intelliscore and the FICO® Small Business Scoring Service (SBSS) score may as well.
• Use Credit, Then Make Sure Positive Information is Included
“Buy things you’re going to buy anyway on terms, and pay them off on time, and that will go a long way,” Detweiler says. Ask creditors to notify the bureaus of your on-time payments, and you can improve your credit score in as little as a year.
Now that you have a better understanding of business credit, you can put this financial tool to work for your company. Just remember to stay proactive: Don’t assume that positive information about your business is getting to the credit bureau. Vendors must actively report your payment history for your credit rating to reflect good habits. Ask potential suppliers if they report at least to D&B, and provide them with your account information for that agency to ensure that your record is updated.
In the long run, strong business credit can help you finance unexpected opportunities, manage cash flow and maintain a great reputation. Start by getting copies of your credit reports to see where your business stands now. Then start building—and using—your business credit to your advantage.