When starting a new business from scratch, there are several factors you need to consider from marketing materials and hiring employees to selling products and saving money, that your business’ credit could easily take a backseat on the priority list. However, maintaining your business’ good credit is extremely important when it comes to building a successful company.
What Is Business Credit?
Much like your personal credit, your business’ credit score determines whether your company can be trusted when it comes to handling money. Think of your business’ credit score as a gauge for the reputation of your company. Among other factors, it reveals any sign of your business’ delinquent payments or bankruptcy, which could affect your chances of landing future business relationships. If your business has poor credit history, potential lenders or investors may not want to partner with your company because it would be considered a high risk endeavor.
Why Is It Important to Build Business Credit?
While you may have excellent personal credit, you won’t want to put a loan for your business in your name for liability reasons, as you could become responsible for your business’s debt. Understanding how to establish business credit is crucial to separating your personal and business finances. There is always a chance that your business could hit hard times, and if your business cannot repay the loan, you don’t want that debt reflected on your own personal credit report. In extreme cases, creditors could go after your personal assets if you filed the loan in your name. Therefore, it’s best to build business credit first and then apply for business loans with your company’s credit report instead.
The better your business credit, the more financial opportunities your business will receive. For one, if your business has a good credit history, lenders will be more likely to loan your business money. Not only will lenders trust you to repay them, but they will generally offer you lower interest rates than if your business had bad or no credit history. By learning how to establish business credit, your business can access loans, invest in new products or equipment, and grow more sustainably.
In the same way that lenders won’t mind engaging in business with your company, investors and partners may be more inclined to invest in your business as well. Your business’ credit score will prove that your company is reliable.
Additionally, good credit creates a safety net for your business. You may not need extra money now, but what if sales drop next month? Can you still pay your company’s rent? Will you have enough money to cover your employees’ payroll? If your business has already built good credit, then your business should have no trouble borrowing money during a financial bind.
How Does Business Credit Work?
Business credit is similar to personal credit but focuses on a company’s financial history and reliability. It reflects the business’s ability to repay debts, access loans, and manage credit responsibly. Lenders and vendors use business credit scores to evaluate the risk of working with a company.oh i
Strategies to Improve Creditworthiness
Improving business credit starts with timely payments to creditors and vendors. Establish credit lines with suppliers, and keep your credit utilization low. Regularly checking your credit report for errors and building strong financial relationships can also help enhance your business’s creditworthiness over time.
How to Establish Business Credit
Now that you understand the importance of good business credit, the following are just a few simple steps, which can help your business build credit.
1. Form a Business Entity
To begin, your business must have a legal business entity, such as a corporation or LLC, which will allow to you to build your business’ credit separate from your own credit.
2. Apply for a Tax Number
Next, your business needs a tax ID (EIN), which you can receive through the IRS website. This tax number lets your business create a business bank account.
3. Set up a Business Bank Account
You’ll need a business bank account in order to apply for a business loan, so your next step should be setting up at least one account for your company.
4. Register with Business Credit Bureaus
Your business entity and EIN also allow you to apply for credit file numbers with business credit bureaus. Many businesses register with Dun & Bradstreet, which is the largest business credit bureau in the United States. Because Dun & Bradstreet is one of the top three credit bureaus, a business profile with the company is considered necessary for your business’ success.
5. Ensure that Vendors Report Your Business’ Credit History
If the companies you work with don’t report your business’ payment history to the credit bureaus, then there’s no proof of your financial responsibility. Check with the companies that grant your business credit to make sure that they are sending your good credit for the bureaus to track.
6. Manage Payments
Do everything in your power to manage any debt and stay on top of payments. Whether that means creating a budget, cutting back on certain expenses, or setting up payment reminders, you should make paying bills on time a priority. Any delinquency in this area will negatively impact your business’ credit score, which will make it difficult for your business to attract lenders, partners, or investors in the future. But if your business does begin to struggle with debt, don’t hesitate to contact a financial advisor for professional guidance.
How To Check and Monitor Business Credit Scores
Monitoring your business credit scores ensures you stay informed about your company’s financial health. Major reporting agencies provide regular updates on your credit profile, allowing you to catch potential issues early.
Dun & Bradstreet
To check your business credit score with Dun & Bradstreet, you need to apply for a D-U-N-S number. Once you have this unique identifier, you can access their credit monitoring services to view your company’s credit score, payment trends, and financial performance through their platform.
Equifax Business
Equifax allows businesses to check their credit scores by purchasing credit reports through their website. These reports include detailed information on payment history, debt levels, and risk factors. Subscribing to Equifax’s monitoring services lets you keep track of any changes to your business credit profile.
Experian Business
You can access your Experian Business credit report by purchasing it directly from their site. Their reports provide insights into your company’s credit behavior, including outstanding debts and payment history. Experian also offers ongoing monitoring to help you stay on top of your business’s credit health.
Frequently Asked Questions
How does business credit differ from personal credit?
Business credit focuses on a company’s financial history and repayment ability, while personal credit reflects an individual’s financial reliability. They are separate but can influence each other if personal guarantees are involved.
How can I improve my business credit score if it’s low?
Pay your bills on time, reduce your debt-to-credit ratio, and establish relationships with vendors who report to credit agencies. Regularly checking your credit report and disputing errors can also boost your score.
Can business credit be transferred if I sell my company?
No, business credit is tied to the entity, not the owner. If the business remains intact, its credit history typically stays with it. However, changes in ownership may impact creditworthiness depending on the new owner’s financial history.