Business credit is one of the most important determinants of your firm’s creditworthiness. Having a favorable business credit score can not only fetch you good rates on financing plans but also provide you with better insurance options. Suppliers, too, rely on business credit to assess your firm’s reputation. For new and budding business owners, building favorable credit fast is a key priority and dictates your firm’s long-term prospects. Despite certain similarities, business credit is distinct from personal credit scores and relies on a wider range of parameters to determine creditworthiness.
While this distinction might seem unnecessary for sole proprietors, it serves to protect your business prospects from any past missteps in your personal finance. This article will guide you through the key aspects of business credit and shed light on some of the most useful tips on how to build business credit quickly and the best practices to maintain it.
Business credit functions on the reports of financiers, credit firms, and other companies that report your firm’s payment history. These reports are often collected and compiled by specialized reporting firms. The firms then sell these reports to prospective financiers or suppliers that wish to evaluate your credit history before doing business with you. Whether it’s credit or large-scale supply orders for your business, credit scores are a guiding parameter for financiers and distributors alike. Though these characteristics are similar to those found in personal credit score evaluations, several key differences make the business credit score more nuanced than its limited counterpart.
Business credit reports are more easily accessible and are sold to anyone that requests them, unlike personal credit reports which are provided only on a need-to-know basis. Also, not all financing and supply firms report payment history to the reporting firms. Creditor names and credit limits are often not mentioned in business credit reports, making it difficult to identify companies that are connected with the respective reporting firms. Like personal credit, however, business credit reports also rely on financial activity and businesses will need to show a tangible positive track record to prove their creditworthiness. Interestingly, there also exist hybrid business credit reports that might take into account your personal credit in case you’re operating a small business or are new to the industry.
Conventional and LLC business credit is among the most basic requirements for credit firms. Apart from aiding your prospects in securing financial assistance, this metric can also help you establish crucial relationships - such as those with your suppliers and other business-to-business vendors. It is a marker of reliability and trustworthiness that your business has built over some time. Building a business credit score allows you to negotiate lucrative deals, helping you maximize your prospects in the industry. Essentially, networking determines the extent of your business success, and a good business credit score can be the most straightforward aspect you can use to your advantage when establishing connections as a small business owner.
Bad scores will essentially decrease your chances of gaining funding. Businesses with average or bad credit scores might also be forced to take out funding at higher rates of interest to offset risk. This often results in added financial pressure and the increased burden of hefty liabilities. Since these scores are dynamic, a good credit score is not sufficient, and maintaining it at an optimal level is of key value. Understanding, improving, and maintaining your business credit should be among your top priorities as a small business owner.
Building a business credit score is a nuanced process. The time required to build a satisfactory business credit score varies depending on the nature and extent of your business. These credit scores are primarily determined by your payment and financial history. These metrics also burn down to how quickly you can establish tradelines for your business. While some experts think you need up to three years in the market to establish a creditworthy rating, it is also possible to gain a favorable score in a shorter period. The key distinction here, however, is that the time taken to establish a credit score and reach a favorable credit score is different.
The longer your business operates, the higher the chances of your business’s financial history making it into prominent reporting firms’ analyses. This can range from your business bank account, credit cards, and even short-term business loans. New businesses are often advised to immediately begin building their credit scores to avoid delays in their funding plans. Prominent credit assessment firms like Dun & Bradstreet, EQUIFAX, Experian, and FICO are all known to consider the period and the extent of your firm’s history in the market despite their distinct formulae to calculate the final score. Setting a target for your business might come in handy if you’re looking to become credit-viable in the shortest possible time.
As a cornerstone of efficient business practice, building your business credit score has several long-term implications for your business’s financial health. Below are a few tips on how to build a beneficial business credit score:
Forming an LLC or incorporating your business is the first step in separating your personal and business credit histories. Incorporating your business will provide the legal precedent to set up a separate business credit score since sole proprietorships and general partnerships are entities regarded to be the same as the business owner. If you are a sole proprietor or general partner and do not desire a business credit score, your personal credit score will be considered instead. Setting up an incorporation will allow you to detach your business’ financial transactions from your personal credit history. Once incorporated, you can apply for an Employer Identification Number (EIN) which is required by the IRS for registered businesses.
To be assigned a credit score, you require a credit file registered with any of the major reporting agencies. Whether it’s Dun & Bradstreet, Equifax, or Experian, a credit file will allow prospective financial institutions to look up your payment history and evaluate your creditworthiness. As far as Dun & Bradstreet goes, business owners will have to visit their website to request a unique DUNS number. The other agencies, however, do not impose any such requirements. Some of these agencies might also require your EIN to link and streamline your financial history.
Business owners must remember that not all business accounts report financial history and transactions to reporting agencies. To ensure you don’t end up picking an account that doesn’t share information with these agencies, you need to look up the accounts that report to your credit agency and pick one accordingly. Experts often recommend either two or three accounts with firms that report to your chosen credit agency. These firms often include financing firms, credit card companies, suppliers, and credit builder businesses.
Among the simplest ways to establish a track record of payments is to sign up for a business credit card with a company that reports to your business’ credit reporting firm. The advantage of business credit card firms is that they often only request a personal credit score to evaluate creditworthiness. This often opens up prospects for both seasoned businesses and fledgling firms. All businesses must have at least one business credit card, but having more than one might be a good idea if your business is growing.
For inventory-based businesses, one of the easiest ways to build business credit fast is by establishing a supplier credit. You can pay your suppliers either several days or weeks following an inventory replenishment. Businesses must ensure their suppliers are reporting to the relevant credit agencies. If this is not the case, you can list the supplier as a trade reference to arrange for a manual follow-up on your credit history.
Timely payments are the most important part of setting up a business credit score. Avoid late payments, and ensure your payments reach your creditors’ accounts before the specified deadlines. Even a day’s delay might impact your business credit score detrimentally. Early payments are ideal and help your business maintain a good business credit score. Once a period of payment has been established, be sure to check your credit score regularly.
Reaching your desired business credit score is only one step of the overall process. Maintaining it at the optimal level is a key aspect of retaining your creditworthiness. The below steps will help you maintain a healthy business credit score:
Category: Business Spotlight
All credit rating firms have a unique scale of scoring businesses. At Experian, businesses are rated on a scale from 1 to 100, with 1 being the lowest, and 100 being the highest possible score. On the other hand, Dun & Bradstreet has a delinquency rating of 1 to 5, with 1 denoting low-risk businesses and 5 indicating high credit risk.
Business credit scores are crucial determinants for financing firms. However, most financing companies consider a variety of factors and determinants alongside your business credit score when considering your application.
The employer identification number allows you to link up with several credit agencies, streamlining the overall process. Also, the IRS requires most businesses to have an EIN for operations.
Despite clear distinctions between personal and business credit scores, both of these parameters might be taken into account by a few financiers. This hybrid approach is not common and is limited to a few industries.
With the above tips and suggestions, you can stay aware as a business owner and enhance your existing business credit score. Watch out for key indicators in your credit reports and take timely action if you notice any concerning details.