Understanding and establishing Business Credit for your startup
Starting and running a small business comes with both responsibilities and opportunities. And one of these duties is establishing a business credit profile. Some small businesses rely on either personal or business credit to help finance the purchase of new machinery, acquire inventory, and expand their operations. Even recurring costs like payroll can be covered by short-term loans. Maybe you have tried to apply for a business credit card, then you may have heard of business credit scores? Your business credit can be equally as important as your personal credit. And similarly to a personal credit score it can offer banks and lenders a snapshot of a startup or small businesses financial health and its ability to repay and manage debt. So understanding how business credit scores work is essential for determining ways to improve it.
Could possibly help you secure more favorable financing terms the next time you apply for a line of credit, small-business loan or get an insurance policy for your startup business.
How is a business credit score calculated?
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Similar to personal credit scores (FICO), businesses also have credit scores. The determining factors and ranges are a little different. Typically a personal credit can range from the low 350 to high 800, where business can be scored on the ranges of a scale from 101 to 992, or a scale of 1 to 100 (Dun & Bradstreet and Experian both use this scoring system.) No matter which scale is used, small businesses should have a thorough understanding of why business credit matters, how it can have an impact and how to improve it.
Now according to the website Ondeck’s article titled “understanding business credit”, the information used to build a report on your business credit comes from several sources:
- Your business credit history—the credit accounts your business has obtained in the past and your payment history with those lenders or other creditors
- Any legal filings that could include recorded liens, lawsuits, judgments, or delinquent taxes
- Other information found in the public record like your industry, how long you’ve been in business, etc.
Checking your Business Credit Score
The three main business credit reporting and scoring bureaus are Dun & Bradstreet, Equifax, Experian and Fico so long as a business is a legally registered entity. Each of these credit bureaus offers online access to business credit reports and scores. If you Google “Business credit” some of these websites will be advertising for you to get your score free or a nominal fee. Dun and Bradstreet uses a system called the PAYDEX® Score that is used to calculate many business credit scores and ratings.
Some other factors that can come into play in the scoring include:
- Payment History- detailed information about your accounts with utilities, business credit cards, banks, vendors, suppliers, and other creditors. This information will include the date when an account was established, any current outstanding balances, any past due status, and a detailed history of payments.
- Public Records- information about your company that can be found in city, state, county, and federal records such as business license, property ownership, tax reporting status, and potentially negative information like tax liens, lawsuits, judgments, and previous bankruptcy actions.
- Lines of business credit- that were applied for and established in the last several months (hard inquiries)
According to Dun & Bradstreet “sometimes businesses are evaluated on their business credit when they bid on contracts or shop their supplier services to potential business partners.” Why? Because companies want to make sure they are working with associate businesses that can deliver products on time or complete projects as promised – and have a low risk of going out of business.
Here are 6 ways to improve and manage your business credit score profile
- Monitor your score- signup and regularly check on your profile and understand what it says about your business’ creditworthiness. This is the best way to determine where you need to focus your efforts. And actively monitoring your company’s credit file is important to help gauge how your firm looks to potential partners. Dun & Bradstreet offers a free tool called CreditSignal that sends alerts if your scores or ratings change.
- Separate business and personal credit use- if you are a startup or small business owner try to avoid using your personal credit for business credit purposes. Using your personal credit for business doesn’t do anything to build your business profile and may even hurt your personal score. Part of your personal credit score is measured by how much credit you have available and how much you regularly use. The higher balances associated with business expenses can have a negative impact on that part of your personal credit score.
- Open up a business line of credit- maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. Many small business financing consultants suggest that first-time applicants should start a modest line of credit and pay off the debt quickly as a way of building a business credit profile. Some seasonal businesses rely on unsecured lines of credit as a source of off-season working capital.
- Setup trade accounts with your suppliers- vendor credit is relatively easy to obtain and your prompt payments with suppliers are a good way to build a strong profile. 30- or 60-day payment terms might not be a $50,000 or $100,000 small business loan, but will help you qualify for a business loan in the future.
- Make sure your suppliers report your good credit behavior- if they don’t report to the bureaus, you are building a good credit reputation with that particular vendor, but it’s not doing anything for your profile. This is important enough that you should always ask any potential vendor if they report; and if they don’t, encourage them to do so.
- Use the credit you need and stay current- the single biggest influencer of your business credit profile is making each and every payment in a timely manner. What’s more, avoiding credit is not a good strategy for building your business credit profile either. Using credit wisely can be a smart tool for fueling growth and other initiatives, but lenders look for a track record of responsible credit use and avoiding credit altogether will limit your options should you ever apply for a small business loan in the future.
Establishing and maintaining a strong business credit profile is an important part of running a successful, profitable business. Having a solid business credit profile is not a guarantee for getting qualified to securing financing for your business. But it opens up more options then compared a business that has a bad business credit profile. It is important to monitor and take control of your profile by showing good financial discipline and repayment history of the accounts you have. So that when you need access to capital to grow your business, you can get it at reasonable interest rate lending terms. Building a strong credit profile can help lower your business insurance premiums as well. Thomas Huckabee CPA offers San Diego businesses cash flow advisory services as well as many of other accounting and tax services, contact us for a free consultation. If you are thinking about raise capital to cover startup costs, expand your offerings, or weather seasonal business swings.