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Whether you’re in the early stages of building a business or you’re at a point where you could use more funding, building your business credit score can unlock your company’s potential.
Here’s everything you need to know to make it happen.
What is business credit?
Business credit represents your company’s ability to borrow money or acquire financing. It’s similar to personal credit but specifically linked to your business instead of your personal finances.
Your company’s credit score is used by lenders, suppliers, or other potential partners to assess the potential risk of working with you.
If a bank loans your business money, how likely are you to pay that loan back in full? A higher business credit score means your business is more likely to manage any new credit responsibly.
Why does a good business credit score matter?
A good business credit score shows the world (or at least lenders) that your business is doing well and can be trusted. This helps you access the funds you need when you need them, for things like buying new inventory or equipment.
Sometimes, in the act of doing business, we have to pay for things to do the job before we receive any money from a client. So there’s a gap between the time the cash goes out and the time the cash comes in — credit can help you bridge that gap, giving you a way to pay for things until that money comes in.
Also, like getting a discount at a store you often buy from, you can get better interest rates & terms on loans and credit cards.
What’s a good business credit score — and where can you see yours?
A good business score depends on where you look. Several major credit bureaus report credit scores for businesses, and each one uses a different scale.
Let’s walk through them.
Who reports business credit scores?
There are four main places you could get your business credit score:
- Experian’s Intelliscore Plus — Scores from 1 to 100. The higher the score, the better.
- Dun & Bradstreet PAYDEX Score — Same as Experian
- Equifax’s Small Business Credit Risk Score for Financial Services — Uses a rating system that ranks scores from 101 to 992.
- FICO’s small and medium enterprise (SME) scores — Scores run from 0 to 300.
How business credit scores are calculated
Different agencies use different methods, but the core elements they focus on don’t change a whole lot from one to the other.
Here’s a breakdown of the main factors that affect business credit scores.
Payment history
The most significant factor for business credit is how good your business is at paying its bills on time and in full — whether that’s loans, credit cards, or trade accounts. If you’ve been paying all your bills on time, it’s much more likely that you’ll pay any new bills or loan payments on time too.
Credit utilization
This refers to how much of your available credit you’re using. If you’re close to maxing out your business credit cards, that might mean your company is in financial trouble. If you’re well under your limit, that’s more likely to be a sign of financial health.
Keeping your credit utilization low — ideally below 30% — is considered good practice.
Debt-to-income ratio and outstanding balances
The amount of outstanding debt your business has matters, especially in relation to how much revenue you’re bringing in. A company that brings in $1M per year can generally carry a lot more debt than one that’s bringing in $60,000.
If you have a lot of outstanding debt compared to your revenue, your business could struggle to pay back any additional debt.
Length of credit history
The longer your business has been around and responsibly using credit, the better. Lenders like to see a track record that proves you’ve managed your finances well for a long time.
A newer business will have less credit history, but they can build business credit with tools like secured lines of credit or equipment loans that are often easier to get than other forms of financing.
Public Records
Business credit bureaus also consider any negative public records about your business, such as bankruptcies, tax liens, or judgments. These items tend to hurt your score a good bit if you have any.
Industry risk
The type of business you’re in can also influence your score. Some industries are considered riskier than others, so if you’re in a tough industry, that could bring your score down a bit.
Still, it’s not as big a factor as the ones listed above.
Company size and revenue
Larger companies or those with higher revenues may be viewed as less risky. This isn’t necessarily a direct part of the score calculation, but it’s often used by lenders when deciding whether to extend credit to a company that’s requesting it — like for a loan or new credit card.
Steps to build business credit
Like with personal credit, there are a few things you can do consistently to ensure you get recognition for your good business practices, such as paying on time and strengthening your credit history.
Let’s walk through them.
Step 1. Establish your business entity
First, ensure your business is legit! Register your business and obtain the necessary state and local licenses to operate. You want to make sure everything about your business is legal and that you’re operating with the proper approvals from state and federal officials.
This is also a great time to put together a business plan. Potential lenders will want to look at your goals, your business’s practices, how you plan to grow, and how you’ll use their financial support practically and responsibly. A strong plan shows that you mean business — literally!
Step 2. Obtain an EIN (Employer Identification Number)
After registration, you can go online and apply for an Employer Identification Number (EIN). This is essentially just a social security number but for your business. It works as a tax reporting number so it’s important for your business credit.
Be sure to use the official link through the IRS. It’s free.
Step 3. Open a dedicated business bank account
With your EIN in place, it’s time to set up a secure bank account for your business. It’s important to keep your personal financial records separate from your business records since it’ll help when you’re reporting back to the IRS. Plus, a dedicated business account helps with keeping an eye on your business’s cash flow and preserves its financial credibility.
Step 4. Get a D-U-N-S® number
The role of Dun & Bradstreet
Let’s talk a little bit about Dun & Bradstreet and its role in business credit. Like Experian and Equifax, they collect information about how consistently companies pay their bills and how well they’re doing financially. Lenders and other businesses look you up by your D-U-N-S number to decide if they should lend money or do business with a company.
Obtaining a D-U-N-S® Number
- There are four simple steps to getting a D-U-N-S number:
- Check if you already have one: Go to the Dun & Bradstreet website and search for your business.
- Gather your information: Submit your business name, address, phone number, and other details. Your business details need to be in the public record, so if you’re a new LLC, you may have to wait a couple of weeks for your company to show up online.
- Apply online or by phone: Fill out the application on the Dun & Bradstreet website or call their number.
- Wait for your number: It usually takes a few days to get your D-U-N-S number.
- When you receive your D-U-N-S number, pay attention to your Duns & Bradstreet Paydex score. It shows how well your business pays its bills on time and assesses your reliability overall.
Step 5. Build business relationships with vendors
What trade credit is and how it affects your business credit score
Trade credit is like borrowing money from a vendor or supplier to buy something you need for your business and paying it back later. It’s a way for businesses to get things they need without paying cash upfront.
Trade lines work as a record of these borrowing agreements. They show how well a business pays its bills on time. It’s important to get these trade lines reported to the various bureaus.
How to establish trade credit and the importance of paying on time
Paying your trade credit bills on time helps build good business credit. It’s like proving to lenders that you’re responsible with money. So, using trade credit wisely can improve your business’s financial reputation and improve creditworthiness.
Step 6. Use business credit cards
How a credit card can help you build business credit
A business credit card is an awesome tool not only to get needed funds for your business but to also prove credit history and utilization. Timely payments can show your lenders that you can take care of your credit responsibly. To start, you can test out a secured credit card where you make a small deposit and borrow against those funds. This helps in developing a sense of how well (or not!) you spend your money, and how resourceful you are with credit when it comes to your business.
Business credit card options when you’re a new business owner
You should know that getting a business credit card may not be easy — banks want people to be in business for a while. For this reason, your first business credit card may be secured.
My first business credit card was secured. All I did was put $5,000 in an interest-bearing savings account, and I was given a card with a $5,000 credit limit, which I religiously paid off every month. After a year, they increased my limit without me having to increase my savings. I still have a high-dollar credit card with that bank, even if they’ve long since given me my initial deposit back.
Pro tip: Use these cards as tools to build credit, not as an excuse to spend thousands of dollars. Repay your credit debt on time but consider carrying over smaller balances. This helps to boost your credit score while maintaining a reliable and seasoned credit history.
Step 7. Consider a business loan or line of credit
Types of business loans
There are three basic loans available to small businesses:
- SBA loans: Loans are backed by the government, making them easier to get for small businesses. They offer various types of loans for different needs like starting up, expanding, or buying equipment for your locations.
- Term loans: A lump sum of money you borrow from a bank or lender and pay back in installments over a fixed period of time. These are the most common loans and are good for big purchases like equipment or real estate.
- Lines of credit: A borrowing limit. You can borrow money up to that limit as needed and pay it back as you go. It’s great for managing cash flow and unexpected expenses, such as needing to buy a new software tool or hardware to complete a job.
Qualifying for a loan
Lenders look at a few key things when deciding to give your business a loan:
- Your business’s financial health: The banks and lenders analyze things like your income, expenses, and profits to make sure your business can handle the loan and you operate with fiscal confidence.
- Your business credit score: This shows the banks how well you pay your bills.
- Your business plan: Have a business plan ready to show banks how you’ll use the money they give you and your means of making it back.
- Your personal credit score: Lenders may look at your personal credit, especially for small businesses.
Step 8. Monitor business credit reports
Understanding credit reports
Your business’s credit report looks at:
- Payment history: How well your business pays its bills on time.
- Credit utilization: How much of your available credit you’re using.
- Public records: How your public trust and reputation stand, looking into any lawsuits, bankruptcies, or liens against your business.
Checking your credit regularly
Stay on top of your business credit reports so you can address any problems immediately. Use a trusted service to help you explore new credit opportunities and check your scores consistently.
If you find an issue on your credit report, do this:
- Gather evidence: Collect documents that support your dispute, such as receipts, payment confirmations, or court records.
- Contact the credit bureau: Submit a dispute letter to the credit bureau that outlines the erroneous or problematic information. Include your business details, account numbers, and a clear explanation of the error.
- Follow up: Wait for the credit bureau’s investigation. If the error isn’t corrected, you can dispute it again or contact the original creditor.
- Add a dispute statement: You can ask the credit bureau to add a statement explaining your dispute to your credit report.
Step 9. Maintain strong financial management
Accurate record keeping
Never underestimate the power of consistent and accurate business records. Remember, “if it’s not written down, it doesn’t exist!” Don’t wait until you get audited by the IRS to realize your records are woefully slim or incorrect.
Cash flow management
Using business credit cards and lines of credit strategically can help improve the cash flow of your business. If you use credit as a tool and buy things that are needed at the right time, such as the beginning of a project, by the time the client pays, you can pay off high credit balances and not incur more interest.
Keeping your business credit separate from your personal credit
Building business credit is not the same as building personal credit — you’re building credit for your business, which is seen as a separate entity. You should always keep your business finances separate from your personal, making sure you have separate accounts for each.
Business credit vs. personal credit
Imagine business is like going to school.
Business credit is like a report card for your company. It shows how well your business handles the money coming in and going out.
Unlike your personal credit score, which is about you, your business credit score is about your company’s financial health. Building good business credit helps you get loans and better deals, allowing for flexibility and improved options when it comes to your financial dealings.
Does business credit go on your personal credit?
Usually, your business credit doesn’t affect your personal credit. But, if you personally guarantee a business loan, your personal credit could be on the line if your business can’t pay.
While your personal credit might be looked at when you start a business, it shouldn’t heavily influence your business credit over time.
Final thoughts
Building business credit takes time and consistency. Pay off high balances on time. Keep accurate records. Check your credit reports regularly.
If you feel overwhelmed, it may be time to hire some help, like a bookkeeper, accountant, or business credit specialist.
The Small Business Administration (SBA) may even be able to help. They have resources and people ready to help you when you need them.
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