Building business credit is very similar to building personal credit. However, the concept of business credit is often misunderstood. For many small business owners and entrepreneurs, building business credit starts with building personal credit first.
Understanding the difference between personal credit and business credit and their relationship to one another is the first step. Keep in mind that while personal credit scores are based on well-established formulas and have widely-accepted benchmarking criteria, business credit is a lot more subjective and non-standardized.
If you have applied for a business loan, especially for a new business, you were likely asked to submit your credit score or personal credit history from one of three personal credit reporting agencies such as Experian, TransUnion or Equifax. In most cases, lenders will look at a small business as an extension of its owner…and it’s owner’s credit worthiness.
Therefore, for many business borrowers, a personal guarantee of the loan or financing may be required.
You may have created a business plan for starting your company, it’s a good idea to have a similar game plan for establishing business credit.
Business Credit Scores (D-U-N-S Number)
Over time your company can build a credit history; and is most commonly tracked by Dun & Bradstreet (“D&B”) by virtue of your company’s DUNS Number and your company Employer Identification Number (EIN). A DUNS Number is a unique identifier assign to each company that functions similarly to an individual’s social security number in addition to the company EIN. In addition, the traditional consumer credit bureaus (mentioned above) have introduced business credit score ratings as well. Most common is known as the FICO Small Business Scoring System (FICO SBSS).
Monitoring your business credit profile and addressing negative issue is a fundamental part of building your business credit score.
Consumer credit scores range from 300-850 while most business credit report scores range from 0-100.
Financial institutions that lend to small businesses are increasingly becoming more sophisticated in using algorithms to determine lending risk to businesses. This has led to a sharp increase in lending to companies compared to lending based on personal credit.
D&B provides excellent support for companies looking to set-up their DUNS number. They do offer several levels of service, including a free service for startups and small companies.
What Do Lenders Look For When Making Loans to Small Businesses?
Understanding what lenders look for will help you prepare to get your business finances in order and build your business credit score. Depending on the type of loan you are applying for, a little preparation may help you present your business as a good credit risk. This can help because good credit profiles may lower your interest rate and give you access to more borrowing power.
On the other hand, not maintaining proper business records and having bad credit or a poor credit history is likely to lead to a small business loan rejection.
Companies such as Intuit, the owner of Quickbooks accounting software are starting to offer business loans. The use your Quickbooks account data to determine whether to lend your company capital. In the same way, online lenders can evaluate your financial records to make the same decisions.
Time in Business – Lenders want to know that your company has been in business long enough to know the business is viable or “bankable”. It is widely known than most small business failures occur in the first two years after startup. So, the age of your business is a significant factor in a lender’s loan decision.
Most lenders will require a minimum of one year of operating history. You will likely need to submit banking statements and business tax returns to show your operating history.
Cash Flow & Revenue – Lenders also want to know about your overall annual revenue and your company’s cashflow. These two figures will give lenders an idea of the size of loan they will grant and gives them a guideline of how much your company has for monthly payments to repay the loan.
Keep in mind that your bank statements show the flow of revenue and expenses that occur within your business. This will give the lender an idea of how you manage your finances.
For example, if your bank statements show several months of low or no income, they will likely ask you to explain the gaps in income. In some cases this may be common, like in the case of landscaping where business falls-off in winter months. This is known as a seasonal business.
It also shows the lender how you spend your money. Be aware that lenders may flag your financial statements if they detect a lot of odd expenses or personal expenses coming from your business account. Owners that use their business account for personal expenses are a red flag in many business lending algorithms.
Maintaining a Business Bank Account – It is vitally important to open and maintain a business bank account. Many lenders will not make a loan to your company if you do not have a business bank account.
In addition (as mentioned above), it is very important to keep your personal banking transactions separate from your business transactions.
Payment History – This is a big one. If you have a history of taking loans and have repaid them on-time, you have likely establish a strong business credit history. Payment history, including on-time repayments is perhaps the most important factor in determining your business creditworthiness.
How To Build A Good Credit Score For Your Business
If your business has no credit or bad credit, you can take steps to build and improve this score by using some simple credit building techniques. The first step is to establish a D-U-N-S number with Dun & Bradstreet. From there, think about building business credit incrementally. Below are simple ways to start to build your business credit.
Apply for a small business line of credit from your bank or credit union. Use a portion of your credit line and pay it off on time.
Similarly, apply for a business credit card. Business credit cards are easier to qualify for than many conventional loans.
Ask your vendors to report on time payments to Dun & Bradstreet. Vendor reporting is an important factor in determining your business credit profile in D&B. Your transactions with industry vendors is referred to as Trade Lines. Trade Lines are essentially lines of credit from your suppliers. Be sure to make payments (IE net 30 days) on time consistently.
Building business credit will take time and a deliberate effort. However, over the course of months, companies can make a profound improvement in business credit by following the steps mentioned above.