Why is it Important to Build Business Credit?

Building business credit is crucial for company owners wanting more for their firms. Delayed or insufficient financing is the second most typical reason companies fail, according to the Small Business Administration (SBA).

By building your business credit, you’ll have access to sufficient financing to:

  • Cover day-to-day expenses.
  • Grow and expand.
  • Buy inventory.
  • Hire and onboard additional staff.
  • Maintain your cash on hand to pay for your cost of doing business.

Doing the work to build your business credit will help open up more opportunities for your company. Lenders, suppliers, and bankers rely on business credit reports to analyze your company’s creditworthiness. By establishing and maintaining healthy business credit, you help safeguard your company, making it possible to access the funding you need.

What Is Small Business Credit?

To know why it’s important to build business credit, it may help first understand what business credit is. Like personal credit, business credit is used by credit card companies and lenders to decide whether your firm can be relied on to manage its money and pay obligations on time.

You can think of your business credit report as a barometer for the economic reputation of your company. Like your personal credit profile, your business also has a grade, or credit score, that you should be aware of so that you know how to improve it.

What Is a Good Credit Score?

Several reporting agencies generate business credit scores, and each uses a different model.  Though the numbers typically range from zero to 100. The higher your score, the lower your expected risk. A decent rule of thumb is to build your score to at least 80 and keep it there.

The primary business credit bureaus are Experian, Equifax, and Dun & Bradstreet, and each uses different score calculation methods and indicators. 

  • Experian’s Intelliscore Plus is a statistically-based credit scoring system with a one to 100 range. It uses several factors, including payment history, new lines of credit opened, and payment history.
  • Equifax’s credit score for businesses adds three different components to decide your company’s risk level: a business failure score, the likelihood of your firm becoming seriously delinquent, and a payment index that shows your on-time payments. 
  • Dun & Bradstreet PAYDEX score ranges from 1 to 100 based on the history information they have on file. Your scores improve as your payment performance increases.

The FICO Small Business Scoring Service (SBSS) ranks companies on the probability that they will make on-time payments. SBSS scores are utilized for lines of credit, term loans, and SBA commercial loans up to $350,000. 

Their scores start at zero and can go as high as 300, though the higher your score, the better. You need a minimum score of 140 to pass the SBA’s pre-screen process. 

Why It’s Crucial to Build Your Business Credit Score

Though there are many ways to get funding for your business, building your business credit can give you access to standard financing methods, including:

It Becomes Easier to Qualify for a Loan

Having a credit score of 80-plus opens doors and allows you to qualify for a small business loan much easier. Companies with stellar credit scores can usually meet the requirements for a standard loan quickly and painlessly.

You’ll Get Better Loan Terms

Favorable loan terms will generally always go to companies that can prove their creditworthiness. For example, you could use your excellent credit to leverage a lower business credit card rate and save your business thousands of dollars.

Personal Finance Protection

Building business credit is great for keeping your personal and business finances separated. Doing this protects your business from financial issues you may be encountering in your personal finances and the other way around. However, it’s still crucial to monitor your personal credit report since lenders may want to look at your credit score.

Suppliers Will Give You Better Terms

Building your business credit is not only helpful for company financing, but it also looks good when negotiating credit terms your suppliers provide. Your suppliers will see your company as financially stable and able to cover debt obligations promptly. 

When you buy more equipment and inventory, your clients may be more comfortable forgoing payment and letting you buy on credit.

Gain Access to Cash for Expansion and Growth

If you decide to grow your operations, taking out a loan will allow you to expand more than you had first intended. Whether your expansion includes more inventory, equipment, or new facilities, a loan can help you start.

Factors that Can Impact Your Small Business Credit Score

Building and improving your business credit score takes time — 12-18 months, according to some sources.

Along the way, it’s a good idea to understand the things that may affect your business score, including:

  • Public records
  • Liens or bankruptcies
  • Payment habits
  • Outstanding balances
  • Business size
  • Years your company has been on file

How Your Company Can Build a Strong Credit Score

Your business credit profile isn’t confidential, which means anyone can view your report. Therefore, if you can, you should establish and sustain robust business credit from the beginning. Take time to create healthy financial habits, including:

  • Paying your bills on time — Try to pay your bills early and in full if possible. This is important because, over time, the reporting agencies will see your company managing its finances well.
  • Check your scores often — Checking your scores frequently will help you discover issues or mistakes on your credit report.
  • Pay your tax liens — Tax liens can cause serious damage to your credit score. Pay your tax lien in full as soon as you can.
  • Reduce debt — To build your business credit and improve your score, you’ll need to do whatever you can to repay your vendors, pay off your company credit card, and get rid of any other past-due balances.
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