Everything You Need to Do to Build & Establish Business Credit

Everything You Need to Do to Build & Establish Business Credit

Good business credit is just as important for your company as having a high personal credit score is for your individual finances. A business credit score is basically a rating of your business’ fiscal responsibility and the likelihood that it can meet its financial obligations. But did you know that the advantages of good business credit can go beyond the ability to get a loan?

First, establishing and building business credit creates a financial identity for your business that is distinct from your personal financial profile. This adds a layer of separation and protection between your business finances and your personal financial affairs.

Of course, good business credit can make it much easier to get financing for your business. And the more financing options you have, the better off your business will be in terms of cash flow, weathering emergencies and the ability to take advantage of opportunities. This applies to both borrowing funds and establishing credit with vendors.

But good business credit also has other benefits. A high business credit score may help you land lower rates for insurance, and it can also help create a positive impression for other companies that are considering doing business with you.

So what does it take to get a good business credit score? Here are some tips.

Understand the Differences Between Personal and Business Credit

Even if you’re new to business credit, you are probably familiar with your personal credit score. A personal credit score summarizes your financial history — including elements such as payment history, defaults or bankruptcies, credit lines and more — into a score that represents your creditworthiness. Lenders use this score to determine whether to approve your application for loans or credit cards. Business credit scores also summarize creditworthiness, and they can evaluate how likely it is that your company will go out of business within a certain time period.

One major difference between personal and business credit scores is the range of numbers that can be assigned. Personal FICO scores range from 300 to 850, while business credit scores generally range from zero to 100.

While personal credit scores are calculated using standard FICO algorithms, there is no standard method for business credit scores. There are three major business credit bureaus: Dun & Bradstreet, Equifax, and Experian. All these credit bureaus collect financial data about your business from sources that include:

  • Banks
  • Other lenders & financing providers
  • Vendors
  • Trade associations
  • Credit card issuers

Generally, this data will be verified by third parties. However, keep in mind that each credit bureau uses different criteria to come up with business credit scores.

Another major difference is that business credit reports are public, unlike personal credit reports — which only you and selected entities can access. Business credit scores can be accessed by anyone! They may be used by lenders, or other companies that are considering doing business with you…and even competitors.

Finally, unlike people, businesses are not entitled to a free credit report each year. You’ll generally have to pay to see your business credit score/report.

Begin a Credit History

In order to show up on the radar for the major credit bureaus, you will need to have some business credit activity. This can include lines of credit or payment terms with vendors, credit cards in the name of your business, loans and more. The important thing is that you start a history of payments in the name of your business so the credit bureaus have data about your company to evaluate.

In many instances, your business may show up in credit bureaus’ databases as soon as it starts paying bills. In the case of Dun & Bradstreet, you’ll generally need a Dun & Bradstreet number (called a DUNS number). In addition, Dun & Bradstreet must have records of your payments with at least three vendors in order for your business to get a PAYDEX score, which is based on your business’ payment performance.

Dun & Bradstreet collects information on businesses in order to compile its credit profiles, so it may have already assigned you a DUNS number. You can check to see whether you already have one before applying. Likewise, you can search Experian and Equifax for free to find out if your business has a profile there.

Pull Your Credit Report

All the business credit bureaus offer individual reports and ongoing monitoring services at various price levels. While there are various services that may allow you to get some part of your credit report for free, you will generally have to pay to get the full business credit score and report from each bureau.

Monitor Your Business Credit Scores

Credit reports can contain errors about your credit history, and these can negatively affect your business credit score. It’s up to you to spot these and correct them. You should check your credit score with each major agency at least every six months (and no less than every year) to make sure your report is free of errors and there is no fraudulent activity that can affect your score. You can correct mistakes by contacting the bureau.

Pay Bills on Time, Every Time

Paying your bills on time is the single most important thing you can do to establish and build your credit. Credit bureaus reward businesses with a consistent history of early payments, so this is a good habit to get into from the beginning.

Dun & Bradstreet‘s PAYDEX score is based entirely on your payment history. For PAYDEX, the earlier a business pays bills, the higher the score. A score of 100, for example, would indicate that a business consistently pays bills at least 30 days in advance of the due date.

Pay Attention to Your Debt Ratio

Even if you pay all your bills on time, your credit rating can be negatively affected if you use up all of your available credit or have other imbalances in your debt-to-credit ratio. Generally, you should be using no more than 20 percent to 30 percent of your open credit lines.

Give Yourself Credit

It (literally) pays for your business to think ahead about its credit. Establishing and building business credit long before you actually need it sets your business up for the widest range of options when it does come time to reap the rewards of a strong business credit profile.

How have you built your business credit? Let us know at 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.
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