Many of our customers have asked us how to build business credit. Business credit is essential whether you’re a business owner that’s always paid cash for everything or a newer business. This article will demonstrate how to build business credit and why you need it.
Where to find my Business Credit?
There are several Business Credit Reporting Agencies, but the most common ones are Experian Business Credit and Dun & Bradstreet (D&B). Both have a similar scoring model of 0 to 100 with 100 posing the LOWEST business credit risk (or best possible score).
For Dun & Bradstreet, you can contact them and request a D-U-N-S number for free. This number is used by a potential creditor to view your company’s business credit with Dun & Bradstreet’s platform.
Also, you will need a Federal Tax ID number also knowns as Employer Identification Number (EIN) from the IRS. This is also free and is analogous to having a social security number for your business.
Other platforms that report business credit are Lexus Nexus, Paynet, Small Business Financial Exchange (SBFE), and Credit.net. Regardless of the forum, it’s important for you as a business owner to access and monitor your business credit on a regular basis.
What do I need Business Credit for?
You need business credit for more than just securing a business loan. Your business credit could be a major factor in being awarded a contract. Before that contract can be issued, part of the due diligence is making sure you can deliver goods and services on time.
In our business, if we are working on financing a piece of equipment for one of our customers, the vendor has to be approved. Why? We need to make sure the vendor will deliver the equipment upon receipt of payment. If a vendor does not have any business credit, they will be required to deliver the equipment before they are paid.
Your business credit score will determine what type of credit terms a vendor, credit card, or business loan you qualify for. It is an indicator of not only how you pay, it tells the inquirer whether you pay early, on time, or late.
A lack of business credit history demonstrates a lack of maturity and experience for a business. Let’s say your business pays a bill late or a tax lien is levied against your business; you don’t want that to be the only item reporting to your business credit profile.
How Do I Establish Business Credit?
Open A Business Bank Account. Obvious, right? Some businesses skip this step and instead mingle their business finances with their personal. Opening a business bank account under your Federal Tax ID number breaks down your business deposits and debits on a monthly basis. It is normally required to start applying for any type of business credit.
Apply for Business Rewards Credit Card. You can utilize a business credit card without paying any interest. First, ask what business credit bureaus the credit card company reports to. If they only report to personal credit, this is not the right card. Second, find the credit card with the best rewards to you. Typically a cash back program is ideal or, if you travel a lot, something that gives you travel points. Lastly, pay the balance in full each month to avoid paying interest.
Ask your Vendors for Credit Terms. Tell your vendors that you are trying to establish credit for your business. Ask if they report to business credit. Then ask if you can start with Net 30 terms and progress to Net 60 assuming you pay as agreed.
Equipment Financing. Cash is king. Why would you finance equipment when you can pay cash? Because your operating capital is your life blood. Showing future creditors that you can not only pay on time, but pay for sustained period of time adds an additional layer to business credit profile. This helps when applying for business loans & business lines of credit in the future.
Is My Personal Credit Important?
Simple answer is YES! Especially in the early stages of your business. To establish business credit, you as the owner really are the business. Therefore your personal credit demonstrates to potential business creditors what kind of payment history you have.
The good news is that business loans and vendor credit accounts do not show up on your personal credit unless you are a sole proprietor. However, if you have payment issues on a personally guaranteed business trade line, it may show up on personal credit as well.
Am I Required to Personally Guarantee?
In most cases yes. The reason is that a business creditor needs some leverage in the debt collection process. Debt consolidation companies and bankruptcy proceedings can encourage businesses to walk away from debt. The business creditor’s awareness of this possibility makes a personal guarantee almost always required. A personal guarantee also lowers the risk profile for a business because the owner feels strongly enough about their business to back it personally.
But, a business with a deep credit profile that also exhibits a long history of paying early or on-time has much more leverage in regards to future borrowing power. Once a business owner has invested enough time to build a strong and extensive business credit profile, financiers may be able to waive the personal guarantor requirement.
How to Build & Grow Business Credit?
Once you’ve established some business credit, it’s time to grow it and make it the best it can be. This is a long process and patience is required. Here are the steps to build your business credit.
Monitoring. Dun & Bradstreet as well as Experian Business Credit allow business owners to monitor their business’s credit. There are free services and paid services. Whichever option you pick, ask the credit agency to walk you through your report and how to apply best practices for improving your score. Errors are common and monitoring your credit allows you to stay on top of and rectify any errors.
Pay Early. An 80 Paydex score from Dun & Bradstreet means that you pay all of your obligations on time. This is a really good score, but you get extra credit with D&B for paying early. Ask your vendors and suppliers if they have any early payment discounts. Pay Early when you can.
Always Pay Your Taxes. Find a good accountant and an even better bookkeeper who will stay on top of your finances. File your taxes on time. Have your accountant help you with tax planning and tax benefits. Remember the more risk you take with tax deductions, the higher likelihood of an audit. Not paying taxes, not paying enough taxes, and not paying taxes on time leads to government liens. Pay the government. This is crucial to your business credit.
Keep Debt Serviceable. What can you afford? Look at your cash flow for the last 6 months and calculate the difference of revenue coming in versus expenses going out. Assuming the delta of that is positive this tells you how much room there is to take on business debt.
Establish a Need First. Establishing and building business credit is essential, BUT there should always be a need. As mentioned above, you should use your business’s finances to determine what is logical for your business.
As always, we at Better Business Funding want to help. We offer a variety of business financing solutions that can help establish and build business credit.