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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:
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.
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.
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.
Track Business Credit with D&B
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:
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.
The credit reporting firms collect three basic types of information regarding your business:
Your business credit score is then calculated based on the following factors:
There are many reasons for a low business credit score, including but not limited to:
This differs from one credit reporting agency to the next, however, here is Experian’s approach:
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:
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:
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.
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:
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:
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.
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.
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.
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.
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?