What is business credit and why do I need it?
Business credit is very similar to personal credit, but with some differences which we will discuss below. Business credit is as important to a business as personal credit is important to an individual, if not even more so. A high business credit score and an excellent financial track record could give you access to hundreds of thousands if not millions of dollars, which alternately would be highly unlikely for an individual to ever have access to apart from a mortgage loan. Good business credit also unlocks lower interest rates and better financing terms. If you run a business or are thinking about starting one, you need to understand the importance of establishing a business credit score.
Business credit is important for several reasons:
- It allows you to separate personal expenses from business expenses
This is important for many reasons, the most obvious being that the accounting and accountability will be much easier to manage. Tracking expenses throughout the year will make tax season much less stressful for you and for your accountant. Having business credit and keeping all business expenses separate from personal expenses also means that if your business runs into any sort of financial trouble, it will not affect your personal credit.
- It will give you much higher capacity when you want funding
If your business needs any kind of loan or financing, the capacity available to you will be significantly higher when applying as a business rather than applying as an individual. According to the SBA (U.S. Small Business Administration), businesses tend to receive 10 to 100 times more credit capacity than individuals do.
- It allows you to get better terms when you lease or finance
When you want a new copier or company car for your business, you will want to get the best terms. Low down payment, low interest rates, and great repayment terms. If you have great business credit, these will be much easier to attain.
- It increases the value of your business should you ever want to sell
When a potential buyer is looking to buy your company, you can bet they will look into the business credit report. If your business has a credit line of $500k and another business they are looking at has access to $5M in funding, that could definitely be a selling point for the other company.
How does business credit differ from personal credit?
To start with, business credit is scored on a scale of 0 to 100 while personal credit is scored on a scale of 300 to 850. A score above 70 is considered excellent for a business, while a score above 700 is considered excellent for an individual.
More importantly, there are a few factors that go into your business credit report that differ from a personal credit report. A few of these factors include:
- The demographic of your business, including business size, years in operation, and the SIC code (or Standard Industrial Classification which is basically the category of business you are in)
- Legal filings against your business or that your business has been involved in
- The three reporting bureaus are not the same as for personal credit. While Equifax and Experian do report on business credit, Transunion does not. Rather the third bureau is Dun and Bradstreet, often known as D&B or DNB.
How long does financial information stay on my business credit report?
According to Experian:
- Trade data – 3 years
- Bank, government and leasing data – 3 years
- Uniform Commercial Code filings – 5 years
- Collections – 6 years, 9 months
- Judgments – 6 years, 9 months
- Tax liens – 6 years, 9 months
- Bankruptcies – 9 years, 9 months
How do I establish business credit?
Now that you understand the basics of business credit and the importance of establishing it, you might be asking yourself what your next steps should be. We have compiled twelve basic steps that every business should take.
- Incorporate your business
Your business must be an incorporation or LLC in order to obtain business credit.
- Obtain an EIN, or Employer Identification Number
This can be obtained by submitting an application to the IRS, and this can be done online.
- Obtain a DUNS (Data Universal Numbering System) number, through DNB
- Open a business checking account – Most major banks will offer business checking accounts as an option (and many will give you free checks if you are persistent enough)
- Check with all three credit bureaus to make sure that a credit profile has been established for your business
- Apply for a business credit card
This will be one of the best ways to start building your business credit. Some of the most highly regarded business credit cards include:
- Establish trade lines
If you buy supplies or inventory in your business, those purchases can help you build your business credit. Ask your suppliers to extend trade credit to you. This essentially means you pay for items a specified number of days or weeks after you receive the inventory.
- Lease equipment for your company
Many companies lease copy machines for their offices, and this is a great place to start. As a new business, you may have to apply with your personal credit attached, often known as a “personal guarantee.” A long term lease is another excellent way to start establishing a great credit score.
- Pay on time, every time
Never pay a bill late. This is absolutely critical to keeping a squeaky-clean business credit score.
- Make sure your vendors are reporting your data to the three reporting bureaus
Some companies do not automatically report this data to the three reporting bureaus, so make sure they are. If they are not, you may be able to submit this information to your credit profiles manually or find another vendor.
- Work towards spending 100% of your business expenses through your business
It is crucial to stop spending personal money on business expenses. This may not be possible in the beginning, but make this a goal that you are working towards. It makes accounting, accountability, and taxes much less of a burden. It also will have a very positive impact on your business credit score and will keep your personal assets protected.
- Check your business credit reports and scores often
Sign up for some sort of credit monitoring, and check your scores and reports often. Many business owners find errors on their reports, and these can negatively impact your credit score. Be vigilant about checking and quickly correcting any errors found.
The bottom line
Good business credit is critical to obtaining great financing terms, low interest rates and higher capacity funding. As your business grows and your ever-changing needs require you to obtain financing or new equipment, you will be very happy you read this article and started building your business credit today. Length of credit history is very important, so starting today is crucial. The sooner you begin, the sooner you will have an excellent credit score so don’t wait!