The Importance of Business Credit

The Importance of Business Credit

As a business owner, there are many times when your creditworthiness is important.

Maybe you need to rent space and need a landlord to agree to a lease.

Maybe you need to make arrangements with suppliers or other vendors.

Maybe you need a business loan to grow your business or help with cash flow.

As your business depends on others assessing the risk in working with your business, your business credit score becomes critical in your business’s ability to move forward.

According to a survey by the U.S. Small Business Administration, 27% of businesses were not able to receive funding when they needed it.  For some of these businesses, it impacted their ability to grow.

Establishing strong business credit will provide you with more options when you need it.  Let’s look at some of the components of business credit.

What Is a Business Credit Score?

When you take out a car loan or a home loan, a lender will check your credit score.  The score tells the lender a lot about how much debt you have and if you have made payments on time.

A business credit score is very similar.  It gives a lender, vendor, or anyone looking to work with your business an idea of how you have handled your obligations.

Extending credit is about ensuring that the creditor will be repaid.  If past obligations have not been handled well, it will make creditors wary of doing business with you.

Business Credit Versus Personal Credit

It is important to keep your business credit and personal credit separate.  You would not want the weaknesses of one to impact the other.  

Intermingling business and personal credit can also make it difficult for creditors to assess the obligations of the business.

You can do this by establishing a legal entity for your business.  The business will have its own Tax ID and this also ensures separation for liability reasons.

Ensure that all of your obligations, such as any utilities, credit cards, or other payments are in the name of the business.  Open bank accounts in the name of your business.

By doing this, you are forming a clear barrier between your business and personal credit profiles.

What Are the Factors of Business Credit?

Business credit scores use many of the same factors that a personal credit score does, including:

How much debt does the business have?  Too much debt may indicate that the business is struggling and relying on credit cards or loans to stay afloat.

Have payments been made on time?  If payments are missed or late, it shows that the business does not have enough cash to meet obligations.

What is the length of credit history?  If a business has been handling its obligations on time for many years, it strengthens the profile.

Different from a personal credit profile, a business credit profile also looks at industry factors.  The size of the company can or other industry risk can impact the business credit score.

Public records will appear on a business credit report  Liens or bankruptcies will have a negative impact.

How Can You Check Your Business Credit Report?

There are laws that limit who can access a personal credit report and how that information can be used.  Business credit reports are accessible by anyone.

Some of the major business credit reporting agencies are Dun & Bradstreet, Equifax, and Experian.  These companies assign scores to your business, much in the same way that personal credit scores are assigned.  The ranges are different than personal credit scores, so it is important to be aware of what represents a “good” score from each company.

You should monitor your business credit report so that you are aware of what information is out there.  You should also review the contents of the report for errors.

If you find an error, you will want to dispute it with each agency that is reporting the error.  The agencies have information on reporting errors on their websites.  You may need to follow-up to ensure errors are corrected.

Errors can lead to being denied credit in the future.  You could also face higher interest rates, higher insurance premiums, or other unfavorable terms.

There are ways to obtain your business credit report for free.  You should make it a habit to check your report once or twice a year.

Strengthening Your Business Credit Profile

The stronger the credit profile of your business, the easier it will be to obtain new credit in the future.

You may find that you need a loan to finance the purchase of additional equipment to grow your business.

Or your business may hit a rough patch, and you need a loan to help you get through a tough time.

For whatever the additional need, your business’s history of handling credit will be a key factor in a creditor’s decision to extend additional money.  Credit is about assessing risk.  You want your business to be viewed as “low risk.”

Moreover, you will receive more favorable terms from lenders if your business credit profile is strong.  You may receive better interest rates or other terms that make the credit easier to repay.

Start Building Your Business Credit Profile

The best time to build your business credit profile is before you are in dire need.

An easy way to do this is through either a business credit card or a business line of credit. In addition to building your repayment history, these will ensure your business has access to cash when needed.

Of course, there are many other types of loans that can help to grow small and mid-sized businesses, from short term loans to equipment loans, to invoice factoring. Review your options with a lender to determine the type of loan that is right for your company.

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