Small Business Credit
Why Is Small Business Credit Important?
When you are just starting your business, you may notice that your business and personal credit report will be linked together initially.
If you are a sole proprietor, you can assume that banks and other different lenders may reference your personal credit history to determine how well you are able to manage debt.
Establishing small business credit is important because it allows you to separate your personal and business credit. Once you establish your business credit and it is reporting separately from your personal credit, it will prevent either one from affecting each other.
With business credit, it is linked to a separate tax ID number instead of your personal social security number. When you establish business credit, it allows you to completely separate your business decisions from your personal credit history. Once the separation is complete, it can allow you to overcome potential funding issues for your business.
The same is also true for your personal credit. For example, if for any reason, your business were to no longer exist, your personal credit would be protected. When you are a small business, if you business credit, you may be able to take out a business loan without having to sign a personal guarantee which would make you liable for any debts your business is unable to repay.
How Does Small Business Credit Help Your Business Grow?
The bottom line is, strong business credit can in fact help your business grow.
Many lenders and other companies will look to your business credit history to rely on it when determining your loan terms, premiums, whether to increase your line of credit or not, and some companies may actually rely on your credit worthiness to determine if they want to consider you as a business partner. Having a strong score can help you lock in better interest rates on loans and help secure better terms with suppliers in your industry.
This will help your business grow because in the long run, you will be able to save money, access funds/assets you need and keep a cash flow. Even though it takes time to build, it may give you access to greater amounts of capital. Establishing strong business credit ahead of time can open many different opportunities for your business and is one less obstacle you will need to overcome.
What Is a Business Credit Score & How Do I Build It?
A business credit score is a score that helps banks and lenders determine whether they want to offer your business credit, and if so, on what terms.
As your credit score increases, you create a track record of responsible financial decisions which minimizes your risk to lenders. This means banks and lenders get the assumption you will be more likely to repay your debts.
Unlike personal credit scores, business credit scores are on a scale of 1-to-100 and a score of 75 or higher is considered excellent. Business credit scores are tracked by their Tax ID or Employer Identification Number. Business scores are publicly available and anyone can look up your business credit report. There are three major business credit agencies which are Dun & Bradstreet, Equifax Business, and Experian Business. It is possible that you may have to apply to these agencies to be tracked.
Dun & Bradsheet use PAYDEX which is a range from 1-to-100 and is based on payment history. Equifax Business credit score takes three factors into account when determining your risk level as a business. This includes: a payment index, a credit risk (the likelihood of your business becoming delinquent), and a business failure score (likelihood of business closing). Experian uses intelliscore plus, which is a score of 1-to-100 that uses factors like: number of years in business, payment history, and new lines of credit.
Small businesses have FICO’s Small Business Scoring Service which will provide a ranking based on the likelihood of making on-time payments. SBSS are used when determining the term for your loan, approving lines of credit, and commercial loans. These scores have a range of 0-to-300. The minimum score to pass the SBA’s pre-screen process is 140 but most lenders have their minimums set to 160.
There are few things that are different from building business credit versus personal credit. There are many lenders and vendors that businesses work with that do not report to reporting agencies. This could lead to many on-time payments that go unnoticed.
Here are a few steps you can take to start building business credit.
1. Make sure your business is registered
Get a federal employer identification number (EIN).
2. Open a business bank account/credit card
Make sure to use your business account only for business transactions. Keep your credit utilization low and maintain on-time payments
3. Use vendors that report to the reporting agencies
Not all business vendors report to the business credit bureaus. To start building a business credit history, try to work with vendors who report payments to the agencies.
4. Make sure to pay on-time
Late payments will impact you negatively and can decrease your business credit score.