Maintaining positive cash flow is one of the biggest challenges of running a small business. When flows drop to a trickle, borrowing may be needed to fill the gap. If you need to finance your expansion project, you may also need to take out a loan.
Good business credit makes it easier to qualify for loans and lines of credit while enjoying competitive interest rates. If you're new to building business credit, it's important to understand how it works and what you can do to achieve a good credit rating.
- Business credit is separate from personal credit and measures a company's ability to meet its payment obligations.
- Dun & Bradstreet, Equifax, and Experian are some of the major organizations responsible for generating business credit reports and scores.
- In addition to looking at a business's credit report and score, lenders can measure a business's creditworthiness using the “Five Cs of Credit.”
- Paying your bills on time and maintaining a low credit utilization ratio are two of the best ways to improve your business credit.
Importance of business credit
Business credit functions similarly to personal credit in that it helps you qualify for a loan or line of credit when you need to borrow. If your business has a good credit history, it will also be easier to get approved for a credit line through a vendor or supplier.
Having access to credit and financing as a business owner contributes to your overall success. For example, if your customers don't pay their bills on time and you need cash to cover employee salaries, you can take advantage of your high credit rating to get short-term loans. Similarly, being able to purchase supplies or obtain vendor services on credit can help your business manage its cash flow.
Good business credit can also save you money when borrowing money. The higher your credit rating, the more likely you are to qualify for the lowest interest rates on loans and vendor financing.
Maintaining good personal credit is also important, as lenders and vendors may use your personal credit to evaluate your creditworthiness if a business credit profile is not yet established.
How to check and monitor your business credit score
If you want to check your business's credit profile and credit score, you have several options. It is important to note that each of these companies may collect and organize business credit information in different ways.
dun & bradstreet
Dun & Bradstreet (D&B) provides free access to credit reports and scores to businesses with credit files. To create a credit file with Dun & Bradstreet, you first need a Data Universal Numbering System (DUNS) number. This is a 9-digit number used to identify your business. You can apply for a DUNS number for free on the D&B website.
Once that is done, you will be able to access your D&B PAYDEX score through CreditSignal. When you sign up, you also get free credit monitoring. PAYDEX scores range from 1 to 100 and focus specifically on past payment history. A higher score indicates a company is more likely to pay its invoices on time.
A “good” business credit score varies depending on which scoring model is used, but generally a higher score means a lower risk to lenders.
Equifax provides business credit reports for companies in a variety of industries, including financial services, healthcare, manufacturing, and retail. Equifax business credit reports are designed to help you identify current and future credit risks that may affect your business.
Get a free monthly credit score through Equifax Core Credit. You can also view your updated Equifax business credit report. For more information, please fill out the inquiry form on the Equifax website.
Experian provides instant online access to your small business credit report. You can check the business credit of your company or another company by entering the company name and address.
If you want to check your credit regularly, you may also consider signing up for Experian Business Credit Advantage.
Equifax, Experian, and TransUnion personal credit reports are available for free each week through AnnualCreditReport.com.
Steps to establish business credit
If you're ready to establish business credit, it helps to know where to start. You can create a business profile by following these steps:
1. Register your business and get an EIN
Registering your business with the appropriate authorities makes it legal on paper. Whether you need to formally register depends on your business structure and the laws applicable to your state.
You may also need to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The IRS uses this number to identify your business for tax purposes. You can apply for an EIN on the IRS website.
2. Open a business bank account
Although a business bank account is not necessarily a prerequisite for establishing business credit, it is good to have one for several reasons. Having a separate bank account for your business adds legitimacy to your business. It also makes it easier to separate business expenses, which can be helpful when filing taxes.
To open a business bank account, you may be required to provide an EIN. When deciding which bank to use, it can also be helpful to look at minimum deposit requirements, fees, and other account features.
3. Establish a DUNS number
As mentioned above, you need a DUNS number to build your business credit profile with Dun & Bradstreet. You can request this number online for free.
There is no need to request a special identification number from Equifax or Experian. Once the company you owe money to reports your account activity, credit bureaus can begin building your business credit profile.
4. Consider business credit cards
Business credit cards are designed to make it easy to buy the things you need to keep your business running. You can usually get approved for a business credit card based on your personal credit score, and you don't need to have business income to qualify.
When comparing business credit cards, consider the following:
- Benefits (if your card has a rewards program)
- Fees such as annual membership fees and foreign transaction fees
- Annual Percentage Rate (APR) for Purchases and Balance Transfers
Your initial credit limit may be low, but you can increase it by making on-time payments and paying your card in full each month.
Using your personal credit score to open a business credit card means you are personally responsible for the debt, not the company.
5. Establishing vendor credit
If you're new to building business credit, getting a small business loan may be out of the question at this time. However, you may be able to get approved for a line of credit through your vendor or supplier.
Vendor credits, also known as trade credits, allow you to buy what you need from suppliers and pay for it at a later date. Account history can help build business credit if the vendor reports to his Dun & Bradstreet or any of the credit bureaus.
Strategies to improve creditworthiness
Creditworthiness is a measure of your reliability when repaying debts you take out for yourself or your business. When discussing what it means for small businesses, it's important to cover the 'Five Cs of Credit'.
The Five Cs of Credit refer to five criteria that lenders can use to measure your creditworthiness. They are:
- capacity: Capacity refers to the ability of a business to incur and repay debt based on current and expected future cash flows.
- capital: Lenders also measure creditworthiness in terms of capital. That means how much leeway you have when it comes to financing your business.
- collateral: Collateral is an asset that can be pledged as security for a business loan. This may include inventory, equipment, and real estate.
- conditions: When lenders refer to “terms,” they're talking about the overall state of the economy and how your business is expected to do well financially.
- character: Your personality reflects who you are as a business owner and as a person. This includes any professional certifications you hold, past experience in running a business, and your overall reputation in the community.
How you improve your creditworthiness depends on which of the 5 C's requires the most attention. For example, if your abilities don't look that great on paper, you might take steps to cut expenses and improve your cash flow. This gives the lender confidence that your business has the ability to repay its debts.
Tips for maintaining a good credit profile
Maintaining good business credit is not that different from maintaining good personal credit. Both depend on using credit responsibly. When building your business credit, the following tips will help you maintain your credit score.
- Avoid taking on too much debt that you can't repay from your cash flow.
- Keep your credit utilization ratio on your business credit card low, ideally below 30%.
- Pay your bills on time, including debt payments and payments to suppliers and vendors.
- Monitor your business credit regularly to look for changes to your credit file that could negatively impact your score.
Establishing business credit can take time, and it's important to be consistent when practicing good financial habits. If you're working on improving your credit score to get a business loan, remember that there are other factors that lenders can consider. Your business hours, annual revenue, and industry you work in can all affect your ability to obtain a loan.
What is the fastest way to build business credibility?
Opening a business credit card is one of the fastest ways to build business credit because you don't need a business credit history to apply. Credit card companies can use your personal credit report and score to approve you even if your business is not yet profitable. You can build good business credit with a business credit card if you make on-time payments and keep your credit utilization low.
Can I use my EIN to get a loan?
Lenders can accept an Employer Identification Number (EIN) when applying for a small business loan. Whether a particular lender uses your girlfriend's EIN number or Social Security number to verify your credit depends on its lending policy. Note that some business owners, such as sole proprietorships, may not need her EIN. In that case, you would instead use your Social Security number to apply for a loan.
What was your business credit score when you first started your business?
If you're new to building business credit, you might start with a score of 0. Your starting score will depend on the credit score model you use to track your progress. For example, the Dun & Bradstreet PAYDEX score ranges from 1 to 100, with 1 being the lowest score.
What is the correct DUNS number?
The best Data Universal Numbering System (DUNS) number a company can have is 100. This is the highest possible score on this credit score scale. However, a score of 80 or above is generally considered to be good, indicating that a company is likely to repay its debts and pay them on time.
If a business owner wants to apply for a loan or vendor financing someday, they may want to consider building business credit. Although you can use personal loans and credit cards to fund your business, small business loans and lines of credit may offer better terms. If you need to borrow while you're in credit-building mode, it's worth comparing the best business loans for you.