Business Credit Basics
How it Works and How to Get It
Credit is your ability to borrow money (or get something now and pay later). You’re probably familiar with the concept when it comes to your personal credit scores, but credit for your business is separate from your personal credit – at least it should be.
If you run a business, get familiar with business credit, and start building it so that you can leave your personal credit out of the equation.
Why Use Business Credit?
You can borrow money as an individual, so why go to the trouble of borrowing in the name of your business?
Keep things separate: even if it’s not a big deal now, someday you’ll thank yourself for separating your personal and business finances. To get a loan as a new business, you probably need to apply using your Social Security Number, which means lenders pull your personal credit reports to determine your creditworthiness. That also means that any problems will go on your personal credit reports – making it more difficult to borrow for important purchases like a home or automobile.
Even if all goes well, loans for your business can eat up your ability to borrow as an individual, and that will affect you and your family. Lenders evaluate how much you can borrow based on your income and your existing debt payments (using a debt to income ratio). You can easily get maxed out if you borrow for business.
Until you establish business credit, lenders will require a personal guarantee, even if they approve a “business loan.” You’ll need to put assets such as your home on the line, and those assets serve as collateral for the loan. This can lead to disaster, and it makes it harder to move or refinance while your business loans are still outstanding.
Better terms: a solid business credit score makes it easier to operate. Suppliers are likely to allow more time for repayment, and you’ll have more choices – you can work with high-quality, dependable firms instead of whoever will take you as a customer.
Better financing: when you borrow, you’ll pay less if you have strong business credit. Loan pricing is typically based on risk. The more likely you are to repay, the lower your interest rates and other finance charges. It improves profitability and provides more breathing room.
Increased sales: your credit isn’t just about borrowing – it can also impress potential customers. Customers want to know whether or not you can deliver on their orders, and your business’ credit score is one way to evaluate your operation. If you always follow-through for suppliers, customers are more comfortable placing a big order.
Unlike your personal credit scores, anybody can view your business credit – it’s not confidential, and they don’t need a reason to ask.
How to Build Credit
Building business credit is similar to building personal credit – pay on time – with some additional aspects.
Get legitimate: to start a business credit profile, you’ll need to actually have a business. Do everything you can to separate your personal and your business affairs.
- Get an Employer Identification Number (EIN) from the IRS, and use that instead of your SSN in business situations
- You may also need or want to incorporate – speak with an attorney to learn what’s best
- Open accounts in the name of your business (some banks offer free business checking to get you started)
- If possible, get a credit card, small loan, or credit line from your bank in the name of your business
Get credit: “credit” doesn’t have to be a formal loan – you can also get (and build) credit by working with suppliers. When you buy on credit, you get goods and services today, but you don’t have to pay until later. That model applies to numerous services including office supplies and warehouse space. Anytime you can pay within 30 or 60 days, you’re getting credit.
If possible, work with suppliers and partners who report your credit to business credit bureaus. Even if they don’t report, it’s possible to add these trade lines as “references” to your Dun & Bradstreet report (D&B provides suggestions).
Always pay on time, and pay early for potentially better scores – Dun and Bradstreet’s score is based on how quickly you pay, with a slight bump for fast payment.
Provide information and monitor: building your business’ credit isn’t exactly effortless. You may need to provide information to the credit bureaus, and you’ll certainly want to make sure they have accurate information on your company. Review your credit reports periodically and fix any errors you find.
Business Credit Bureaus
Depending on your definition, there are dozens (or more) of credit bureaus out there for individuals, covering everything from your borrowing history to your medical history. Business credit rating companies are similarly abundant, so focus on the three major bureaus as you build credit: Dun & Bradstreet, Equifax, and Experian.
Each bureau has its own scoring model, and they all use different information. This is where business credit scores differ from individual credit scores – your individual credit scores are similar (although perhaps not identical), based on your payment history, public records, and other information. Even custom scoring models will put you in more or less the same category from lender to lender.
With business credit scores, information comes from totally different sources. At Dun & Bradstreet, for example, you provide much of the information to fill out your profile and your DUNS number. Scores might range from 1 to 100, or they’ll fall on another scale.
Fees, Fees, Fees
Cost is another major difference between your personal credit and business credit scores. Be prepared to pay for information – whether you’re asking or providing information. You don’t get free credit reports every year (like you do as an individual consumer under federal law). Instead, you’ll pay a modest fee to see your credit. If there’s any silver lining, the costs of managing your business credit might be a deductible expense.