The importance of having good credit as a business owner is all in the name, it’s about credibility. When it comes to taking out loans and raising funding from investors, your business credit will help you demonstrate your trustworthiness. In this article, we’ll be breaking down everything you need to know about business credit and show you how to build better credit for your business.
How Is Your Business Credit Scored?
Business credit provides lenders and investors with a financial history of your small business. Any company can access your business credit reports so it is important that you stay on top of these reports in case an investor decides to take a peak. This history will demonstrate how you’ve handled:
- Lines of credit
- Business credit cards
- Tradelines from suppliers
- Business loans
Your credit history will hopefully demonstrate that your business is reliable when it comes to borrowing. You can report your business credit through one of three main business credit reporting agencies:
- Dun & Bradstreet
The three agencies calculate your score by collecting information from the vendors and creditors you work with. They also gather legal information and public records. Each of these agencies has its own algorithm for calculating credit but the following categories will heavily influence your score:
- Credit (length of credit history, how much of the credit line was used, payment history, balances).
- Demographic (the size of your business, how many years you’ve been in business, market trends to identify current risks).
- Public records (bankruptcies, judgments, liens).
Your business credit is tied to your employer identification number (EIN) rather than an SSN.
How to Build Business Credit Fast
As a small business owner, it’s highly likely you business credit will be checked out by an investor or a lender at some point. This is one of the fastest ways for them to find out if your business is legitimate. Here are some tips on how to build business credit fast.
Define Your Business as a Separate Entity
Many businesses start off as a sole proprietorship simple because registration is easier than other forms of business. The downside is that when your business is a sole proprietorship there is no line between you and your business. When working with vendors or applying for a loan you’ll have to use your SSN. Your business activity will be reflected in your personal credit score and your personal assets are vulnerable in the case of business debt or bankruptcy. See the difference in personal credit vs business credit here.
If you want to build credit for your business, the following business structures are ideal as they create a defined line between you and your business:
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
Get an Employer Identification Number (EIN)
An Employer Identification Number (EIN) is essentially an SSN for your business. It allows you to work with vendors and apply for loans as a separate entity rather than having to use your personal SSN. An EIN is vital when it comes to building good business credit.
Open a Small Business Bank Account
Opening a business bank account lets you keep your business and personal assets separate. This makes it much easier to manage your business finances. Use the EIN to open your business account and define it as separate from your personal finances. Credit bureaus will be able to see your cash flow in and out of this account which will be reflected in your credit report. Having a business bank account will also help you access better opportunities for financial assistance including lines of credit and loans. Lenders are more likely to support your business if you have an established business bank account.
Research Your Lenders
If you are wanting to get financial aid for your business, you’ll want to do some research first. If you are making credit payments in a timely manner you’ll be able to boost your business credit. But, if the lender does not report back to the major business credit bureaus, they won’t know about your efforts and your credit score will not be affected.
Establish Trade Lines
Regularly buying from your suppliers and vendors and then paying these outstanding debts on time helps to build your business credit score. Especially when you are making these purchases using lines of credit. It is important that you build good relationships with your suppliers and vendors as this helps you establish trade credit. Trade credit gives you the ability to extend the period of time you have to pay off your debt. For example, you’ll be able to receive NET 30 on invoices meaning you can make business purchases and pay for these purchases at the end of the month. Like with your lenders, you’ll also want to choose vendors that report to business credit bureaus.
Register With Business Directories
Registering your business with a directory will not only positively impact your business credit, but it also helps to market your business and find potential customers. Registering your business with a business directory helps to further define your business as a separate entity away from your personal identity and assets. Credit reporting agencies can pull information from these directories, like your address and phone number.
Regularly Check Your Business Credit Reports for Errors
It’s important you keep an eye on your business credit reports, checking for errors that could affect your credit score negatively. Negative information on your credit report can be the difference between securing an important loan or line of credit and being denied. Errors that negatively affect your credit score could have a long term impact on your business.
Here are some common errors to look out for:
- Mixed business reports – Sometimes reports that are linked to your business may actually belong to an entirely different business. This can happen if another business has a similar name or the same address as yours.
- Years in business – The age of a business can be an important factor used to determine whether a business is established enough to be seen as trustworthy of credit. Make sure your years in business are registered correctly.
- Identity theft – You want to be able to react quickly if you are a victim of this crime.
So how do you fix these errors once you’ve found them? Start by regularly checking your credit reports so you can catch errors quickly and fix them before they have a chance to affect your business in the long term. Make a list of any incorrect information you find and then file a dispute with each of the three major business credit bureaus.
Business Credit vs Personal Credit: What’s the Difference?
In order to build your business credit score, it’s important to understand how it is different from personal credit.
Your business credit is tied to your EIN. Business credit is scored on the following information:
- Number of years in business
- Lines of business credit applied for in the past 9 months
- New lines of credit opened and their credit utilization
- On-time payment history
- Liens and collections
Personal credit is tied to your personal SSN. Personal credit is scored based on the following information:
- 5 Cs of Credit
- Number of accounts
- Types of accounts
- Credit utilization
- Length of your credit history
- Payment history
If you have an established business, you probably already have a business credit score. As we’ve outlined in the article, it is important to keep an eye on your business credit reports. If you are just starting a business and you want to start building a credit score, you can start by opening a business bank account with NorthOne to easily keep your business and personal expenses separate.