by Stormi Scott
The term "business credit" might sound intimidating, but it doesn't have to. It is very similar to personal credit in that it is designed to reflect your company's perceived ability to pay back loans per the contracts they agree to.
The major credit report agencies are Dun & Bradstreet, Experian, and Equifax. FICO also scores small businesses with a rating system known as FICO SBSS.
If your company has strong business credit, it can affect not just your ability to get loans from traditional lenders but lines of credit with suppliers and trust from vendors. Depending on the industry in which you are working, your potential customers might be more confident working with a company that has a good business credit score. Business credit scores are not private anyone with the know-how can check a company's credit score.
Remember, too, that the better your business credit score, the better interest rates will be. Having bad business credit can result in high-interest rates or not loan offers at all. In short, bad business credit has the potential to limit your company's growth potential.
The process by which a company builds credit is not rocket science: they need to open commercial credit accounts and pay their bills on time. However, several steps need to be completed before they can get commercial credit accounts in the first place. To make it much easier to get business credit, make sure your business is correctly set up.
If you have not yet done so, you should establish your business as a separate legal entity, such as an LLC or corporation. In addition to making it easier to establish business credit and gain financing, there are also tax advantages and protections to your personal property compared to working as a sole proprietor.
Then request an Employer Identification Number (EIN) from the IRS. Think of this is as the equivalent of a Social Security Number for your company. You will use it to identify your company when filling out applications for business financing, opening bank accounts, and paying taxes. Opening a business bank account can help your company appear more credible to lenders because it clearly shows the cash flow in and out of your business.
Once you have established your company as its entity, you should begin to apply for business credit. If you have vendors who offer you products or services on credit, ask them to report your agreement and payments to business credit agencies.
Open at least one business credit card with a creditor that reports to all major credit reporting agencies. Maintain at least one open business card. Having more than one open can be helpful, but make sure that you are not using the cards just to use them – carrying a high balance on a business credit card can affect your business credit score just as it would your personal credit score.
Always pay your bills on time or ahead of time if you can. When choosing lenders or suppliers, choose those that report to credit bureaus. Avoid using more of your available credit than is necessary. We recommend getting a business credit card to cover your company's everyday expenses. Not only can this potentially rack up some rewards for you, but it can also help maintain your business credit.
Federal law requires credit bureaus to provide free credit reports to consumers yearly. The same is not true of business credit. It can be somewhat tricker – and costlier – to get a business credit score, but it is far from impossible.
There are other places to get information on your business credit score, but the above are the most credible and well-known options.
One of the main differences between business and personal credit scores is the rating system. Personal credit scores range from 300 to 850. Most business credit score systems, including PAYDEX by D&B and Intelliscore PlusSM by Experian, range from 0 – 100. The one exception is FICO SBSS which ranges from 0 – 300.
Another significant difference is that anyone can check your business credit score. This is very different from a personal credit score that cannot be legally checked without your consent.
Still have questions? We've got the answers.
Numerous factors go into determining business credit scores. Though scoring models vary between rating systems, generally, you can expect your business credit score to be dependent on:
As is true in consumer credit, the most critical factor will be your company's payment history.
There are many types of business credit. The four main categories are:
You can expect the information included on a business credit report to vary somewhat based on which bureau you are looking at, but you should expect to see:
It is very rare that your business score and/or rating would affect your personal credit score.
Sometimes. If you are a sole proprietor, you can expect that your personal credit will impact your business. Anytime you are asked for your Social Security number on a business credit application or lease, your personal credit will likely be reviewed and taken into consideration.
The most common mistake they make is to not structure their company correctly. This generally involves maintaining sole proprietorship instead of incorporating or establishing an LLC. Other common mistakes include: