The Basics to Building Business Credit

The Basics to Building Business Credit

Credit is crucial when you’re running a small business. With all the balls you’ve got in the air, it can be easy for your business credit to slip down your priority list. But the truth is, the earlier you start building your business credit, the better off your business will be.

What Is Business Credit?

Just as you have a personal credit rating, your business has one too. A business credit bureau analyzes your company’s financial history and creates a report and score that reflect your business’ level of financial responsibility. Scores range from 1 to 100, and scores above 75 are ideal.

Anyone — including financial institutions and other businesses you may have dealings with — can access reports on your business credit.

Why It’s Important to Build Business Credit

Your business credit profile is a primary factor in whether your business is approved for loans and lines of credit, as well as what kind of interest rates and other terms you can qualify for. It also affects approval and terms for vendor trade accounts.

Establishing these lines of credit on favorable terms — and using them correctly — can be crucial in solving cash-flow issues, helping your business run more smoothly and facilitating growth.

Your business credit rating can also affect how much you pay for insurance. And, particularly for small businesses, establishing and building business credit is important for separating your own personal credit from that of the company. This protects your personal credit and assets from any liability associated with the business.

Your business credit rating can also have an impact on the overall image of your business. Potential partners and clients may use your credit profile as a way to evaluate the trustworthiness and health of your business and the risk involved in doing business with you. This means a positive report can be an advantage in attracting new business and partnerships.

Checking Your Business Credit Rating

There are several business credit bureaus, including Dun & Bradstreet, Experian and Equifax. Make sure you’re aware of your profiles with all three of these, since you never know which one will be used to check your business credit.

While personal credit agencies use standardized criteria to come up with personal FICO credit scores, business credit bureaus have more latitude; each uses different data and formulas to calculate credit scores.

Your business credit scores may vary with each credit bureau and change over time, so check them regularly and report any inaccuracies in your credit profile.

Establishing Your Business Credit Profile

If you’re a new business, there are a number of steps to establish your business as a separate entity from you as a private person. Once this business identity is established, you can start requesting credit for your business and begin your credit history.

To establish your business:

  • Incorporate your business or form an LLC
  • Get a dedicated phone number for your business
  • Open a dedicated bank account for your business
  • Get a free federal employer identification number (EIN) from the IRS

You may also want to get a D-U-N-S number, which is similar to a social security number for your business that identifies you within Dun & Bradstreet’s business credit database. Other entities use this number to pull a Dun & Bradstreet credit report on your business.

A D-U-N-S number is required to bid on government proposals, and many major companies require contractors, consultants or suppliers to have one.

Because Dun & Bradstreet scours information on businesses to compile its credit profiles, it may have already assigned you a D-U-N-S number; check on whether you have one before requesting one. Keep in mind that even if you have a D-U-N-S number, you must have at least three trade references in order for Dun & Bradstreet to create a credit report and score for your business.

Building Your Business Credit

A great business credit rating reflects a history of responsible financial behavior over time, so it can take some time to build. Here are some steps you can take to get on the right track:

1. Get a Business Credit Card

Getting a business credit card and using it responsibly can help build a positive payment history. In addition, the interest-free grace period that credit cards offer can be helpful in managing cash flow, and many business cards offer valuable perks such as reward programs, travel benefits and more.

2. Set up Trade Accounts

Establishing trade accounts with vendors is another way to build good credit for your business and give you more time to pay for purchases. However, not all vendors report to business credit bureaus, so be sure to ask if they do.

If they don’t report to credit bureaus, you can still list them as a trade reference with Dun & Bradstreet, but you’ll get the most credit-building bang for your buck with trade account partners that report to credit agencies.

3. Pay on Time

Once you’ve got credit lines established, make sure you pay your accounts on time (or early). Your bill-paying record is a huge factor in your credit profile.

In fact, Dun & Bradstreet has a commonly used credit score called PAYDEX that specifically rates businesses on their bill-paying history. Businesses that pay on time can get up to a score of 80 out of 100. To be eligible for a score of up to 100, you need to pay your vendors early.

4. Get Your Debt Ratio Right

Just as with your personal credit, credit agencies like it when you’re using your available credit — but not too much of it. Aim to utilize around 20 percent to 30 percent of your open credit lines.

5. Understand the Impact of Public Records

Legal actions against you such as judgments, liens or bankruptcies can negatively affect your credit rating for a long time. At Experian, for example, bankruptcies stay on your record for nearly 10 years; judgments, collections and liens remain for almost seven years. Avoid these circumstances and take actions to resolve them whenever possible.

6. Build Your Personal Credit

The same entities that check your business credit may check your personal credit too, so it’s wise to make sure your personal credit profile is in good shape as well.

Credit Where Credit Is Due

Once you’ve got the ball rolling on building your business credit, don’t forget to keep tabs on your credit profile to see your efforts pay off. Starting now on building your business credit should reap valuable rewards for your business in the future.

What have you learned when reviewing your business credit report? Let us know on Twitter @Revenued_com.

Jennifer Sokolowsky writes about finance, legal and tax topics for publications and companies including The Puget Sound Business Journal, Avalara, and Avvo.

Dig Deeper into Business Credit