The Ultimate Guide on Building Business Credit

Learn how to build and establish business credit

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how to build business credit

For many entrepreneurs, establishing good business credit is a surefire way of getting their venture off the ground.  And if you don’t have established business credit, you’ll likely have to use your personal credit.

More than 50 percent of small business owners who apply for financing have been denied, mainly because of poor business credit.

So, how do you build business credit?

1What Is Business Credit

Business credit determines a company’s ability to obtain borrowed money from lenders. Such funds can be used to purchase products or services intended to help the operation of a business, typically in the form of a business loan.

Typically, a business credit score ranges on a scale from 0 to 100, with 75 or more being an outstanding rating. Factors that can affect the score include payment history, trade lines, and other credit accounts.

Once a business loan application has been approved, you, the business owner, are obliged to pay back the borrowed amount plus any additional interest or charges at an agreed time frame.

2Types Of Business Credit

There are several types of business credit that your company can obtain, depending on its standing. Each type has its own features that can cater to your business’ financial needs.

Check them out below.

Revolving Business Credit

This type of business credit is considered one of the most flexible ways of borrowing money for your company. Instead of taking out a fixed business loan all at once, a revolving line of credit gives you the option to borrow working capital at any time, based on a pre-approved credit limit. You’ll also have the freedom to choose whether to pay your balance in full or carry a minimum monthly payment — typically around 1 to 1.5 percent of the total amount.

With revolving business credit, you can have a guaranteed business credit line that you can borrow from, up to the credit line max.

Charge Credit

Similar to a revolving credit line, a charge credit has a set limit. However, you are required to pay the total balance in full each month. This way, your company will not accumulate debt in the long run.

Typically, a charge credit does not come with preset spending limits. This allows a borrower to charge large purchases for the company without prior authorization from the lender. However, lenders may still put some limits in place depending on the cardholder’s spending habits and overall financial status.

Installment Credit

Another type of business loan is installment credit. Under this loan, a business owner can take out a set amount of loan that can be utilized for the company’s needs. Typically, you will be required to pay off an agreed amount plus interest in a regular monthly installment. Failing to settle your bill may result in other penalties and charges on top of your monthly balances.

Service Credit

This type of credit involves any deals a company has with service providers, such as internet service, cell phone service, and web hosting. Typically, such an agreement requires you to pay for the services you received each month. This is very useful, especially for business owners who use different types of services for their companies.

Trade Credit

Trade credit, also known as vendor credit or supplier credit, allows a business owner to purchase products or pay for services rendered using a fixed credit limit. Under this agreement, you will be given the option to pay your bills within 10 to 60 days, depending on the agreed terms.

3Who Tracks My Business Credit Score

There are at least three major business bureaus that compile comprehensive data about your business. To determine your score, these credit reporting agencies usually use public information, feedback from vendors and lenders, as well as self-generated reports. Below are the three business credit bureaus and their scoring methods.

Dun & Bradstreet

This credit reporting agency offers the most commonly used business credit score system. Dun & Bradsheet (D&B) gathers public information about a company, such as payment history, financial performance, and overall reputation in the industry. Such details will then be used to generate three individual business credit scores — PAYDEX, Commercial Credit, and Financial Stress score. These ratings can determine whether a company has the financial ability to pay off current and future business loans.

Experian

Experian Business uses a strategic approach in determining a business credit score. Unlike the other agencies, it uses the so-called Experian Credit Ranking Intelliscore. This method utilizes over 800 variables to assess whether a company is at risk of going default or delinquent on its payments. Experian’s business scores range from 0 to 100, with 76 or higher being an excellent rating.

Equifax

Just like Experian, Equifax Business is one of the top choices of banks and lenders when assessing a company’s eligibility for a loan. However, this bureau divides a business credit score into three individual ratings — the Business Payment Index (ranges from 0-100), Business Credit Risk Score (ranges from 101-992), and Business Failure Score (ranges from 1,000-1880)

Equifax based their scoring on factual information such as credit utilization, previous records of delinquencies, length of credit and payment history, as well as the overall financial performance of a company.

4What Affects a Business Credit Score

There are several factors that affect your business credit score. Such factors can either make or break your company’s rating and eligibility for a business loan. Check out some of the most common aspects that help improve your credit score.

Reports From Vendors

Your company’s reputation depends on the feedback from your vendors and suppliers. Business credit bureaus take their reports seriously. That being said,  it is essential to maintain a good payment history with them.

Decreasing Balances

As a business owner, it is inevitable to carry balances and debts, especially if the company is not doing so well. However, it is important to reduce balances as much as possible as it has an immediate positive impact on your credit score. If you currently have balances, be sure to pay them down and gradually decrease the amount.

Monitor Your Credit

It wouldn’t hurt to keep an eye out on your credit reports at least once or twice a year. Ideally, you can obtain such reports from Dun & Bradsheet, Equifax, and Experian. Monitoring your credit can help you assess any changes that might take place during a specific period. If incorrect information appears on your report, you have the right to dispute it and even have it removed given that you have a valid proof that it was erroneous.  

Tip:  Use Nav.com to keep track of your business credit score from all 3 business credit bureaus in one place.

5Benefits Of A Good Business Credit Score

Having a good business credit score can benefit your company in numerous ways. Not only will it prove your creditworthiness but it can also help you negotiate favorable terms with lenders. Here are some of the most common benefits of having a good business credit score.

Helps You Qualify For A Loan

One of the most significant advantages of having an excellent business credit standing is being readily eligible for almost all sorts of loans. Understandably, lenders prefer to lend money to businesses that have already proven their stability through an excellent credit score. Such companies will have an easier and faster loan approval compared to those with a poor credit score.

Protects Personal Credit

By having business credit, you can easily separate your personal and business finances. Typically, company debt goes straight to the business’ credit reports. This will prevent your personal credit rating from being tarnished if your company gets into any financial hot water..

Favorable Terms From Suppliers

Establishing good business credit can potentially help business owners land more favorable terms from their suppliers. For instance, when you purchase something for your company using credit, suppliers may feel more comfortable forgoing prepayment. They might even consider discounts, given that you can prove your financial stability through your business credit score.

Access To Cash Any Time

Another benefit of having good business credit score is the ability to take out a loan any time. This is especially useful if you are planning to expand your business in the future or make necessary upgrades on facilities.

6Tips On Establishing Good Business Credit Score

Obtaining a good business credit score doesn’t have to be complicated. With proper knowledge and preparation, you are sure to improve your standing in no time. Here are some practical tips you can do to achieve an excellent business credit score.

Separate Business And Personal Finances

It is important to separate your business and personal finances when trying to establish a good business credit score.

To separate your finances, consider opening both a personal and business bank account. This will ensure that the two will not commingle with each other.

Acquire And Utilize a Business Credit Card, Line Of Credit Or Lease

The best way to prove that your business is financially capable is to borrow money and pay it back on time. For instance, acquiring a business credit card and settling the balance in a timely manner leaves a good first impression to lenders. It will also reflect on your history of payments. The same goes for other lines of credit and even leasing a property.

Choose Your Suppliers Wisely

You may not know it, but your suppliers can have a significant impact on your business credit score. While it’s true that they are not required to report to business credit bureaus, they can still voluntarily do so.

That being said, it is best to choose a supplier that is willing to cooperate with you in reporting to at least one major agency. This is particularly helpful if you have a positive payment history. It is also worth noting that reporting to credit bureaus is free of charge, so you can expect suppliers to agree and do it.

Pay Bills In A Timely Manner

This one is a no-brainer. Settling your bills on time or in advance can help boost your business credit score. Your rating largely depends on how well and timely you pay your suppliers, vendors, and lenders. Aside from that, paying your balances on time will prevent penalties and other charges.

Don’t Depend Too Much On Credit

While it’s true that using business credit is convenient, depending on it too much can negatively affect your business credit score.

Typically, lenders take a good look at your company’s credit utilization ratio. If it goes above 33 percent, then your company is highly dependent on credit. This shows that your business is not doing well enough financially, so much so that you are likely to max out your credit.

Establishing your business credit is one of the most important factors in running a company. Not only will it open up financing opportunities but also help your venture succeed. Sure, it can be confusing to understand how things work in improving your business credit score. But with proper knowledge and preparation, you are sure to achieve an excellent business credit score.

Do you have any business credit building tips you’d like to share?  Let us know in the comments!

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Here\'s how to build business credit for your company...