Almost 60% of businesses don’t know their credit score. It turns out that while personal credit may be hammered home, business credit is not sinking in with individuals or business overs. In a recent small business survey, National Funding set out to explore how entrepreneurs were utilizing financing options like business loans for bad credit. Instead, we discovered that the majority of respondents have a blind spot when it comes to business credit.
The fact that this figure is so high is not completely surprising. Business credit is still a relatively new concept, and unless you’ve made a specific effort to learn about it, you’re probably unfamiliar. However, that doesn’t mean you and your business are unaffected. Every enterprise needs access to financing, and where your business credit stands may determine your eligibility.
In order to get everyone up to speed, we have put together a brief but complete guide to business credit. With this guide, you’ll learn everything you need to know about building your business credit.
What is the Purpose of Business Credit?
Business credit offers entrepreneurs an alternative to using personal credit for business purposes. When you apply for financing using your own credit, you individually accept all the risk. Getting approved for the loan may mean putting up personal property as collateral, like your home or automobile. Worse, if there are any issues with the loan, they affect your own credit, jeopardizing your ability to get personal loans in the future. There are lots of good reasons to keep your personal and professional finances separate. Business credit makes that possible.
What are the Benefits of Business Credit?
Separating your personal and business credit isn’t just a way to protect yourself as an individual. Having business credit is also an asset to all your entrepreneurial efforts:
- Better Credit Terms – Credit is used to determine the trustworthiness of your business for many things, not just lending. That means when you have a healthy business credit score, suppliers are more likely to offer generous repayment terms or agree to long-term partnerships. In general, good credit distinguishes businesses worth working with.
- More Financing Options – Even though business loans for poor credit applicants are available, it’s much easier to get approved for financing on borrower-friendly terms if your business has good credit. When you need funding to facilitate growth opportunities or cover cash flow issues, being able to access financing is a huge help.
- Increased Sales Figures – Depending on what industry you operate within, your customers may be looking at your credit score before deciding whether to make a purchase. Unlike personal credit scores, anyone can access business credit scores for any reason. In this case, strong scores can actually increase your sales.
How Do You Get Business Credit?
The best time to open a business credit line is before the business even opens. If that’s not possible, any business owner can open one at any time as long as you fulfill these four steps:
- Form an LLC to ensure your business is seen as a separate entity
- Apply for a Federal Employee Identification Number
- Establish bank accounts under the legal name of your business
- Create a dedicated business phone line with a listed number
- Apply for a credit card or small business loan in the name of your business
Once you have business credit, vendors and lenders will send information on your financial behaviors to the three main business credit reporting agencies – Dun & Bradstreet, Experian and Equifax. That information is fed into an algorithm that calculates your business credit score. Unlike personal credit scores that range from around 350-800, business credit scores range from 1-100. The higher the number the more creditworthy your business is considered.
How Do You Build Your Credit?
Bad business credit scores can hurt you as much as good ones can help you. And even if your scores are good already – generally above 75 – raising it higher only works to your advantage. Follow these tips to ensure your score is as high as possible:
- Check Your Report – Credit reports can contain a surprising number of mistakes and omissions. Regularly review your business credit report to verify that all the information is complete, accurate and up to date.
- Establish Credit Strategically – Not every supplier reports payments to the business credit reporting bureaus. Whenever possible, try to work with suppliers that do. You want your reliable payment history to positively influence your credit score!
- Pay on Time – To a large extent, your business credit score is calculated based on how often you pay on time and in full. Keeping up with payments keep suppliers happy while also making your business look more honest and accountable.
- Balance Your Credit Utilization Ratio – If you don’t utilize credit often enough your score won’t increase, but if you utilize it too much you may be seen as a risky borrower. Generally, utilizing 20%-30% of your credit limit is considered the sweet spot.
There’s no reason not to establish business credit. It’s a relatively quick and easy process that protects your personal assets while benefiting your business. Plus, the availability of business loans for bad credit applicants means that almost anyone can access financing. Hopefully, the next time we survey small business owners the majority will know their business credit score and report that it’s rising.