Business Credit
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If you run a business, it's useful to build two things: a strong personal credit score and a good business credit profile.
Without business credit it can be more difficult to secure capital to grow your company or negotiate favorable terms with suppliers and vendors.
But what is a business credit profile, why does it matter, and who uses it?Check out the answers to these and other frequently asked questions below
A business credit score is a number that represents the likelihood your business will be approved for funding. It's similar to your personal credit or FICO score. However, there are a few noteable differences.
Unlike consumer lenders who rely on TransUnion, Equifax, and Experian for credit ratings, business financing companies, and anyone who is evaluating your business' creditworthiness, turn to Dun & Bradstreet (D&B), Experian, Equifax, and even their own proprietary formulas.
Another key difference between your business and and personal credit is the score itself.
Personal FICO credit scores range from 300 to 850. Business credit scores can range from 0 to 100 on the commonly-used Dun & Bradstreet PAYDEX Score.
Here's some more information on how reporting agencies track your business credit score.
Your business credit score gives lenders a pre-calculated way to gauge the creditworthiness of your business and the size of the loan they'll make.
Some lenders require a minimum score of 75, but other lenders may consider lower scores for small businesses or startups. Newer fintech financers may also give more weight to factors besides your credit scores when determining whether to approve your application for funding.
It's important to note that almost all lenders will also look at your personal credit score. This can get problematic since it makes it harder for business owners to keep their business and personal finances from getting tangled.
"If you're running a company and everything's tied to your personal credit, that has a big impact on your personal life, explains small business credit expert, Marco Carbajo. "It can affect your ability to get a personal mortgage or get a personal credit card, or a student loan, or an automobile. The debt on your business could actually have an impact on your personal credit rating and credit utilization.
This is one big reason why it can be important to establish a business credit profile during the early stages of your business.
Although you may use personal financing to get your business started, it's a good idea to start building your business credit "before you get thirsty,recommends Carbajo.
"Business may be booming right now, the economy is great and maybe you really don't need credit, you have money in the bank. That's the best time for you to start setting up your credit sources,because when things do get tight, that's when banks or lenders constrict. It's important for you to set up multiple credit lines your business can have access to. This includes suppliers, vendors, card issuers, banks, etc.
Many factors can affect your business credit profile including the length of time you've been in business, healthy revenues, and responsible use of credit such as paying debts off on time.
For example, if you've had business loans in the past, credit reporting agencies will consider the value of those loans and how quickly you paid them off.
Other factors include UCC filings and any liens and judgments against the business. Industry risk is also considered. Some sectors may be considered more risky investments for lenders and viewed differently by credit agencies.
You can check whether a credit file exists for your business with each major credit reporting entity: D&B, Equifax, or Experian. Take some time to review it and verify that all the information is accurate.
If you don't have one, you'll need to apply for a D-U-N-S® number which can help you start the process of creating a credit file.
In addition to lenders, for a fee, anyone can look up your business credit score. Typically, though, those who are looking are businesses who are entering a contractual relationship with you.
For example, commercial property leasing companies, vendors, and suppliers may all have an interest in looking at your business credit profile.
There are several red flags that can bring your score down, like missed payments, taking on too much debt, or late tax return filings (among other things).
A great way to maintain a high business credit score is to establish a line of credit with a financial institution and take funds against that line when your business is doing well while establishing a track record of paying back on time.
The good news is that new innovations in fintech are making it possible for a greater number of businesses to get approved for financing, even if they have less-than-perfect business credit scores, relying more heavily on assessing performance across other factors such as business transaction history and other financial data.
With this groundwork in place, don't forget to check your business credit report regularly and dispute any irregularities.
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