Best Ways To Build Business Credit
Making on-time loan and credit card payments, maintaining a low credit utilization rate, and staying out of collections are the cornerstones of building business credit, just as they are for individual credit. However, business credit scores are measured on a unique scale and are tracked by a different set of credit reporting agencies than consumer credit scores.
It would be unusual to find a flourishing enterprise that hasn't benefited from the influx of “Other People's Money” (OPM). Their solid business credit allowed them to secure OPM.
Lenders will check your business credit to see if they can have faith in your ability to repay loans.
A company with a high credit rating has easier access to capital for growth. If your company's credit score is low, according to the “Ten Crack Commandments” of the late great street philosopher The Notorious B.I.G. What, you don't get any credit? Kill it.
What Is Covered In This Article
- Can You Explain the Distinctions Between Consumer and Commercial Credit?
- Can You Explain the Basics of Business Credit?
- What Steps Should a Business Take to Obtain Credit?
- Who Keeps an Eye on a Company's Credit?
- Time Required to Establish Business Credit?
- Methods for Inquiring Into One's Organization's Credit Rating
- Is There Such a Thing as a Good Business Credit Score?
Can You Explain The Distinctions Between Consumer And Commercial Credit?
Though conceptually similar, business credit and individual credit serve different purposes.
According to Brian Bond, Experian's senior vice president of product, marketing, and strategy, here are the key distinctions between individual and company credit:
A person's ability to meet financial commitments and overall financial health is reflected in their personal credit score. It details how many credit cards they have, how many loans they have taken out if they are making their loan payments on time, and if they have ever declared bankruptcy or had their home foreclosed on.
Lenders use a company's business credit to evaluate its risk before extending credit. Business credit is distinct from personal credit. Factors such as the age of the business, number of employees, and industry risk are included in this data, as well as payment history, credit utilization, outstanding balances, collections, liens, and bankruptcy filings.
Can You Explain The Basics Of A Business Credit?
A company's credit score can be compared to a Yelp rating for its fiscal credibility. Most people probably wouldn't patronize a business that consistently receives scathing reviews and ratings of only one star from dissatisfied clients. Similarly, a business credit score aids lenders in deciding whether or not to extend credit to an organization.
Non-repaying business owners are bad for a lender's bottom line. Lenders would rather work with people with a track record of timely payment.
According to L. McKinley, certified financial planner and owner of MNM Vested, LLC in Houston's suburbs, “business credit works kind of like personal credit.” Having a solid payment history looks good on a company's resume.
A lower annual percentage rate (APR) and greater access to financing are two outcomes directly related to a company's creditworthiness.
A line of credit can help a company meet many different objectives, such as making payroll, buying inventory, establishing a safety net, etc. Many business owners still prefer OPM even if they have access to substantial savings.
Bond argued that “it [a business credit score] is crucial for obtaining funding for launching and expanding businesses” (and that doing so can result in cost savings). For instance, a good business credit score “can help business owners qualify for better interest rates and enable small businesses to obtain credit without needing a personal guarantee,” thus reducing the owners' personal liability.
One-quarter of businesses surveyed by the National Small Business Association said they were denied funding. They often struggled to expand their businesses due to a lack of capital.
If a company can't expand, it will struggle to make it in today's capitalist world. It will be overtaken by a more formidable or more nimble rival. Building a successful company and gaining access to capital from major lenders begins with establishing a positive business credit history.
What Steps Should A Business Take To Obtain Credit?
If you want to build up your company's credit, Bond suggests the following steps:
- Name your company and file the necessary paperwork with the appropriate authorities.
- If you want to be treated as a legitimate business, you should incorporate or create a limited liability company (LLC).
- Collect your EIN from the government (EIN).
- If you want to do business under your company's legal name rather than your own, you'll need to obtain an EIN before opening a bank account, credit card, loan, lease, or utility account.
- Get a separate line set up and listed under the company's name for all business-related calls.
- The next step is to ensure that your company is obtaining credit.
Andrew Lokenauth, founder of Fluent in Finance and adjunct professor of entrepreneurship at the University of San Francisco's School of Management, has recommended that business owners set up a line of credit with their suppliers or vendors. Then, request that they report your payment history to the business credit bureaus.
Learn The Ins And Outs Of Establishing Business Credit Without Using Your Own Credit
According to McKinley, business owners should not use their personal social security number when applying for a business credit card or loan. In this way, the payment history can be documented on the company's credit profile.
Experian's Bond recommends that business owners keep their personal and company credit files separate. This will help protect the company's credit in a personal financial crisis.
To avoid having one's own credit dragged down along with the company's, Bond advises that business owners keep their credit lines for the company and their own separate.
Who Keeps An Eye On A Company's Credit?
Dun & Bradstreet, Equifax, and Experian are the three largest companies that track and report on business credit.
According to Bill Ryze, a chartered financial consultant and a board advisor at online loan marketplace Fiona, while Equifax and Experian create credit reports for both individuals and businesses, they do so independently, and the results are compiled based on different sources of information.
The Dun & Bradstreet Company is dedicated solely to determining creditworthiness for companies.
What Is A DUNS Number?
If you don't already have one, Lokenauth suggests getting a DUNS. number right away. It's the first thing you have to do to get your company set up with a good D&B rating.
Dun & Bradstreet gives each business a unique nine-digit identifier called a Data Universal Numbering System (DUNS). Anyone interested in doing business with you can check your rating to learn more about your company's financial stability. According to Lokenauth, a DUNS number is also needed to apply for government grants, contracts, and Small Business Administration loans.
A DUNS number can be requested for no cost from the D&B website by any legitimate business.
Obtaining a DUNS number can take up to 30 days. According to Lokenauth, once your company is established, D&B will rate it and give it a PAYDEX score, which is like a FICO score, but for businesses.
Time Required To Establish Business Credit?
At a minimum, Experian needs one tradeline and one demographic factor to generate a credit score. A business credit report and score are created when either of these is reported about a business owner.
A business credit file can be established in as little as a few days, according to Experian. This will happen when Experian comes across a public record or user-contributed data verifying the company's legitimacy.
However, it will take time to build a solid credit history. You should know that establishing business credit takes time, and anyone promising otherwise is trying to scam you, as Lokenauth cautions.
Small business owners can see their credit improve quickly. Still, Bond says it's more likely to improve gradually as the company establishes a history of timely payments.
“Depending on how actively business owners leverage credit and proactively take steps to build credit, it can often take one to three years to establish business credit histories.”
Are You Tired Of Scams?
Bond recommends that business owners who want to establish and keep a high credit rating do the following: make all payments when due, report all business transactions, and check their business credit report frequently to verify the accuracy of the data contained therein.
For a high credit score, McKinley noted that consistent payment history is required. He emphasized the importance of having a long credit history. The first year of making payments doesn't do much to build a credit history.
The Easiest Way To View Your Experian Business Credit Score
After opening a business credit file with Experian, the business owner can access their credit score by viewing their Experian business credit report. The cost to do the check is under $40.
Businesses can use a credit monitoring service, such as Experian's Business Credit Advantage, for added peace of mind. This service gives business owners unrestricted access to their credit reports and a suite of tools to monitor, manage, and improve their credit score, alerts to notify them of any new inquiries or negative filings, and identity monitoring to proactively detect stolen business data and online breaches.
Any company that needs credit for its operations, whether it be a loan or a credit card, can request a copy of its Equifax business credit report at the time of application.
This cannot be done on the Equifax website, as it requires manual intervention. Instead, you should contact Equifax and request the report directly, proving your authority as a company representative and explaining that you need it to apply for business credit.
Equifax includes several scores for a company in its reports, such as a payment index for the company's payment history, a credit risk score for the company's ability to make future payments, and a failure index for the company's likelihood of closing within the next year.
The PAYDEX Score Is A Business Credit Score Issued By Dun & Bradstreet D&B.
A business credit report from D&B will show your PAYDEX score, costing $61.99. D&B also offers a variety of monthly subscriptions, ranging in price from $15 to $199 per month, to establish and maintain your company's credit.
An alternative to contacting the credit bureaus directly is using the free service offered by Nav, which provides customers with access to their business credit scores.
Is There Such A Thing As A Good Business Credit Score?
Credit scores for businesses and individuals use different scales. Whereas a person's credit score can range from 300 to 850, a company's credit score will only go up to 100, with 100 being the best possible score and the least likely to default on payments.
An individual with a credit score of 670 or higher is considered to have good credit, while a business with a score of 75 or higher is considered to have good credit, as stated by Ryze.
Bond argues that higher credit scores are desirable for business owners because they allow for greater access to capital and other resources vital to a company's success.
Even though it's romanticized to start a company with nothing but one's own sweat and energy, having access to additional funding at low-interest rates can be the key to taking your company to the next level. And if you want to be taken seriously by potential lenders, your business needs a high credit score.
Some Additional Ways To Build Your Business Credit
If your company has a solid credit rating, potential lenders will know they can trust lending money to you. Building a solid credit history takes time and responsible bill-paying habits, but the benefits are well worth the effort.
1. Settle On A Business Name And Use It Consistently
A loan is more likely to be repaid by a security company. Constantly switching company names is a red flag that something is wrong with the company.
If Patty, the small business owner, decides to specialize in selling only kitchen appliances, she could rebrand her company as “Hub Kitchen Appliances” rather than “Hub Household Appliances.” After another turn of events transpires a few years later, she decides to rebrand once more.
Although this is an extreme case, the point is that, unlike Patty, you should only use one name. Given that it is impossible to know how your business will develop in the future, selecting a name that can be easily modified in the event of a strategic shift is advisable.
2. Obtain An Employer Identification Number
You can apply for a nine-digit EIN from the IRS online. When applying for a business bank account, a small business loan, or filing tax returns, an EIN is required.
3. Create A Company Bank Account
Opening a business bank account is possible following the acquisition of an EIN. A company's credit standing can be improved by opening a business checking account, as this will show potential lenders the company's track record concerning the repayment of debts.
4. Examine Your Organization's Credit Rating
Nav's American Dream Gap Survey found that 72 percent of business owners were unaware of their company's credit score availability. Even so, learning how your company stacks up credit-wise is a breeze. One's credit score is available from major business credit reporting agencies (Equifax, Experian, and Dun & Bradstreet). For instance, Experian offers a simple application to access a company's credit report.
Knowing your business's credit score will help you make informed decisions about your company's financial future. Rebuilding credit starts with the basics (but you might not have to wait to get a business loan). If your score is higher than average, you may have to look harder to find places to boost it.
5. Get A Corporate Credit Card
There is no doubt that the length of time you've been in business affects your company's credit score. Applying for a business credit card is like throwing your reputation into the spotlight.
6. Boost Your Debt-To-Income Ratio
All your credit card balances should be added and then divided by the total of your credit card limits to get your credit utilization ratio. Since your credit limit indicates your company's debt-handling capabilities, most lenders will look favourably at a 30% or lower ratio.
One can reduce their credit utilization ratio by consolidating their credit card balances or by requesting an increase in their credit limit from the lender.
7. Don't Pay Late Fees
Your company's credit is affected by how well you've managed your payments in the past. Establishing and maintaining punctual payment history on business credit card accounts is essential. However, your credit score could decrease if you consistently make payments late. Not only is it a good business practice to pay your bills on time, but doing so can also save you from incurring exorbitant interest rates that can bankrupt a small company.
8. Don't Close Your Old Accounts!
So, you've decided to close out some of your older credit card accounts. As the cancellations would streamline your financial situation, it makes sense to do so. However, it's smart to keep the accounts open, as closing them can hurt your company's credit rating.
9. Connect With Your Suppliers And Vendors.
Applying for net terms with suppliers and vendors is a great way to build your company's credit. only if they share information with commercial credit bureaus, if you want to improve your business's credit score and have more leverage in future credit applications, you should cultivate multiple relationships with vendors and suppliers.
10. Keep An Eye On Your Company's Credit Reports Regularly
Our number four tip is to check your business credit score, but this isn't something you should do just once. There are a few reasons why you need to keep an eye on your company's credit report:
You might, for example, be curious to identify successful and unsuccessful strategies. Let's say you've implemented some of our suggestions but are still waiting for the desired results.
Then you should probably read this article again and figure out where you went wrong before it's too late and you need money for your business.
Also, credit bureaus are human and can make mistakes when recording your information. Every so often, you should check your business records for inaccuracies. If you find an error on your credit report, you can dispute it with one of the three major credit bureaus.
After establishing a positive credit history for your company, you will have better access to financing on favourable terms.
But let's say you decide to apply for a small business loan from a conventional lender after spending a lot of time and energy improving your company's credit score. in addition to the lengthy approval process (months). Unfortunately, this is a common occurrence.
However, Biz2Credit makes it easy to secure quick financing for your startup.
To open a second location of GSE Laundry, business owner Gauntlett Eldemire approached a local financial institution for a loan. However, the bank had difficulty processing loan applications promptly because of the coronavirus. He said, “they took over the loan application and came through for me” after he contacted Biz2Credit.
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