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Business Credit: What it is, Why You Need it, and How to Improve it

Are you under the impression that business credit and personal credit are one in the same? As a business owner, this is not a mistake you want to make.

As we have discussed in the past, there are many differences between business and personal credit. So, if you want to avoid harming your business credit, if you consider this as important as your personal credit, it is important to answer these three questions:

  • What is business credit?
  • Why do you need business credit?
  • What steps can you take to improve business credit?

Once you know the answers to these questions, it is easier to make sound financial decisions that will have a positive impact on your business as a whole, as well as its credit score.

What is Business Credit?

Despite the differences between business and personal credit, there are also similarities. Business credit, also known as commercial credit, is defined by Investopedia as follows:

“A number indicating whether a company is a good candidate to lend money to or do business with. Business credit scores, also called commercial credit scores, are based on a company’s credit obligations and repayment histories with lenders and suppliers; any legal filings such as tax liens, judgments or bankruptcies; how long the company has operated; business type and size; and repayment performance relative to that of similar companies.”

Unlike a personal credit score, with a range of 300 and 850, business credit is scored on a 0 to 100 scale. Just the same as personal credit, the higher the score, the lower the lending risk. As an individual, you thrive to push your score as close to 850 as possible. As a business owner, 100 is the magic number.

Who Scores Business Credit?

There are three primary business credit scoring companies: Experian, Equifax, and Dun & Bradstreet.

Since all three firms use a different scoring system, there is no guarantee that your score will be identical across the board. Even so, you should expect it to be within the same general range.

Note: it is important to examine your business credit report from time to time, ensuring that there are no errors (more on this below). An error can contribute to a lower score, thus harming your ability to obtain credit.

Understanding the Basics of Business Credit

Understanding your business credit score can go a long way in ensuring that you make the right financial decisions.

Here is the most basic detail: your business credit score ranges from 0 to 100. The higher your score the better.

The following questions and answers will help you gain a greater understanding of your business credit:

1. How do I secure a credit report for my business?

The best way to understand your business credit is to review your business credit report. All three of the primary business credit reporting firms can provide you with a copy of your report.

For example, Experian has an online system for requesting your report (for a fee), monitoring your business credit, and receiving charge alerts.

2. How is a business credit score calculated?

The credit reporting firms collect three basic types of information regarding your business:

  • Credit obligation information.
  • Legal filings
  • Details of your company’s background collected from public records, collection agencies, credit card companies, state filing offices, and other sources.

Your business credit score is then calculated based on the following factors:

  • Credit. This includes things such as credit utilization, payment habits, balances, and trends.
  • Demographic details. Business size, years in business, and Standard Industrial Classification (SIC) code.
  • Public records. Amounts and frequency associated with bankruptcies, judgments, and liens.

3. What is the reason for a low business credit score?

There are many reasons for a low business credit score, including but not limited to:

  • Missed payments.
  • An increase in slow payment of debt.
  • Current judgments, liens, or collections on your business profile.
  • The number of payments, balances outstanding, and credit utilization.
  • Years in business.

4. How long does data remain on a business credit report?

This differs from one credit reporting agency to the next, however, here is Experian’s approach:

  • Tax liens: six years and nine months.
  • Bankruptcies: nine years and nine months.
  • Judgments: six years and nine months.
  • Trade data: three years.
  • Collections: six years and nine months.
  • Uniform Commercial Code filings: five years.
  • Bank, government, and leasing data: three years.

5. What is the process of correcting inaccurate information on a business credit report?

Your business credit report should be 100 percent accurate. One mistake, even if it does not appear to be a big deal, can have a negative impact on your score. If you come across inaccurate information on your report, do the following:

  • Determine if this is included on the report from all three bureaus.
  • Do your homework to ensure that the information is truly inaccurate.
  • Contact the appropriate bureau(s).
  • Circle the incorrect item on your report.
  • Include an explanation as to what is incorrect.
  • Provide supporting documentation if possible.

Is Business Credit Really that Important?

As a business owner, you have a lot on your plate. You understand the importance of strong finances, but may not have the time or desire to learn more about your business credit. This could be a mistake that comes back to haunt you at some point in the future.

In short, strong business credit improves your finance capacity. For example, you will find it easier to acquire financing for your business. Subsequently, you can obtain a small business loan, for instance, without the need to rely on your personal credit.

Here are several reasons why business credit is important:

  • Improved credit capacity. According to the SBA, “businesses have 10 to 100 times greater credit capacity compared to personal credit.”
  • Increase the value of your company. The thought of selling your company may be the furthest thing from your mind, but this could come into play at some point in the future. Here is what you need to remember: the credit score of your business is fully transferable. If you sell the company, the new owner(s) will benefit from the work you put in.
  • Protect your personal credit. Early in the life of your company, you realize that your personal credit may be the only thing you have when applying for loans and credit cards. You don’t want this to be the case forever. By establishing and improving your business credit, you can leave your personal credit out of the equation in the future. You never again have to mix the two, which will provide you with great peace of mind.

You won’t build business credit over night, but this is something that deserves your attention as a business owner. With the right dedication and approach, it will not be long before you are taking advantage of a solid business credit score. This allows you to secure loans and lines of credit, obtain credit cards, lease equipment, and much more. Best yet, you never have to risk your personal credit or personal property.

Steps for Building Business Credit

At this point, you should have a clear idea of the benefits associated with a high business credit score. Early in the life of your company, you should focus your time and attention on building business credit. It takes time, but soon enough you will see yourself making progress.

Building business credit may seem impossible, but a slow and steady approach will begin to pay off. Here are seven steps to take if you have set the goal of building credit:

  1. Don’t mix personal and business expenses. This is easy to do in the early days of your company, but at some point you need to make the switch. You will not build business credit by using your personal account and credit score. Instead, you need to register your company as a corporation or limited liability company. At that point, once you have a legal business entity, you can begin to use it to slowly build your credit. Once you reach the “tipping point,” stop using your personal credit to benefit your business. You should be able to do this once your company is established and you feel good about your financial situation.
  2. Apply for a federal Employer Identification Number (EIN). This is a step you will take when registering your company, so it is a difficult one to miss. Whereas your social security number follows your personal credit, your EIN is associated with your business credit.
  3. Open a business checking account. Once you have a legal entity and EIN, it is time to open a business checking account. If you already have a personal relationship with a local bank, it may make sense to ask if they have business products as well. Most banks that offer personal banking products can also help with your business needs. At the same time, begin your search for a business credit card. You may not qualify for a high limit, you may even have to opt for a secured credit card at first, but this is an important step in building your credit.
  4. Use your business accounts to pay for expenses. This can include everything from utilities to rent to your business cell phone. Remember, small purchases can have a big impact on your business credit score (especially over the long run). As long as you pay in full and on time, every time, you will make out in the end.
  5. Use credit to make purchases. Are you in the market for new office furniture? Use your credit card. Are you setting up an account with suppliers? If so, use credit. Tip: with suppliers, make sure they are reporting your credit activity to the three major bureaus.
  6. Lease equipment. If you require equipment but don’t have access to the necessary cash or qualify for a loan, consider the benefits of leasing. Not only does this allow you to obtain the equipment you need to grow your business, but it helps to grow your credit.
  7. Keep an eye on your credit-utilization ratio. There are two questions to answer in regards to open credit accounts: “How much is your balance?” and “How much credit is available to you?” For example, you may have a $10,000 balance on $20,000 available credit. This means that your credit-utilization ratio is 50 percent. You don’t want to push this number too high, as a high credit-utilization ratio can lower your business credit score.

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Tips for Improving your Business Credit Score

Improving your business credit score should always be on your mind. As you creep closer to 100, you will realize the benefit this has on your company.

Generally speaking, as long as you utilize your business credit, make payments on time, and avoid financial trouble, your score will remain strong. Even so, you may want to take actionable steps in improving your business credit score. You can do this in many ways, including the following:

Make payments on time, every time

It doesn’t matter if you are dealing with business or personal credit, you never want to make a late payment. Not even one time.

Your ability to pay company bills on time is a big factor in calculating your credit score. Are you able to pay invoices before they are due? If so, you should get into the habit of doing so. Do you send payment for your utilities as soon as a bill arrives? There is no point in delaying, as you know you have to make the payment before the due date.

Understand the benefits of positive trade references

Do you have a positive payment history with business partners, vendors, and/or suppliers? This can have a positive impact on your score, but only if the credit reporting bureaus are aware of the relationships.

It goes without saying that there are some suppliers and vendors that do not share data with reporting agencies. Even so, you can take steps, such as adding trade references to your Dun & Bradstreet (D&B) credit file, to ensure that you get credit.

Focus on your credit-utilization ratio

We discussed this in the section above, and it applies here as well.

Credit-utilization ratio is a major factor when calculating a business credit rating. If you have a high credit-utilization ratio, you are seen as a greater risk. You should attempt to keep your credit-utilization ratio as low as possible. As a general rule of thumb, shoot for 30 percent of below.

Lenders want to know that you can manage your debt. With a low credit-utilization ratio, your business is seen as less of a risk, which increases your chance of obtaining credit.

Increase your credit limit

The nice thing about this is that you can do so without delay. Once you have an open credit account, such as a credit card or line of credit, you are in position to prove to the lender that you are creditworthy. After six to twelve months, you can request a credit limit increase.

By increasing your credit limit, your credit-utilization ratio decreases, which improves your score.

Final Thoughts on Business Credit

As an individual consumer, your personal credit comes into play time and time again. For example, this is a major factor when applying for a car loan, mortgage, or credit card. A high score will work in your favor, increasing your chance of an immediate approval. Conversely, a low score could hold you back from being approved.

You should consider your business credit score to be every bit as important. This may not have an impact on your personal life, but it can make or break your company.

When you understand the ins and outs of a business credit score, including why you need it and how to improve it, you will find it easier to make informed and confident decisions.

There are many aspects of your company that require regular attention. Your business credit should be one such detail. When you have a strong business score, it will work in your favor time and time again.

Do you now have enough knowledge of business credit to make decisions that will have a positive impact on your company?

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood