Your business has a credit score, the same as you and me.
If this is news to you, you’re not alone. In Nav’s Small Business American Dream Gap Report, nearly half of small business owners reported they were unaware that they even had a credit score, and 82% of those who did had no idea how to make sense of it.
And yet, understanding how to build your business credit score is the first step toward financial independence. It allows you to build a financial reputation among vendors, negotiate better terms, and secure future funding.
As much as your score can help you, it can also harm you. Bad scores lead to higher interest rates and premiums, bogging down your finances and inhibiting growth.
Take the time today to familiarize yourself with building business credit: what will help it grow, and what will bring it down.
Business Credit: What It Is And Why It Matters
Your entity’s credit score is a testament to the financial responsibility of your organization–and, by extension, its owner. Unlike a personal credit score, a business score ranges from 0 to 100. Each bureau weighs this number a bit differently. They generally consider a score of 49 or less medium to poor, while 50-75 is medium to high.
To lenders, this little number speaks volumes about whether you fulfill your commitments and if you can manage an influx of funds (like a loan).
As a result, building business credit is key to receiving loans and nailing down favorable interest rates. According to Nav, those familiar with their score are over 40% more likely to be approved for loans.
It allows you to negotiate terms with your vendors. Furthermore, a good score will make banks more willing to increase your line of credit, which will then decrease your overall utilization, and so on.
A low score will do the exact opposite. Banks and lenders will hesitate to qualify you for a loan, which can make or break a startup. The National Small Business Association found that lack of access to capital keeps 35% of businesses from growing. For 20%, this lack of capital threatens the overall survival of their business.
Experian, one of the main credit reporting agencies, reports that a business’s credit history and score affect the rate of the loan it receives. Credit card companies reserve their best rates for those with higher scores, leaving low scorers with higher rates.
Building Business Credit as a Small Business
Building business credit as a legal entity is, in many ways, the same as building personal credit. However, there are some prerequisites you’ll need to fulfill before you can establish business credit.
Steps to Take to Establish Business Credit
Sole proprietors will not have a business credit score separate from their personal credit score.
Only legal structures that are required to have their own Employer Identification Number (EIN) will build a credit history separate from the owner’s personal credit.
To begin building business credit, you need to acquire a Dun & Bradstreet (DUNS) number for your business. This is the number used to identify your business and its financial activity and is used for reporting. Getting your own DUNS number is free and easy to do.
These EIN and DUNS numbers mean that the financial activity of your business is now being tracked. You may already have a business bank account – if not, you should do so immediately. Beyond regular monitoring, it’s a best practice to keep your personal and business finances separate.
Another easy way to begin building business credit is by working with vendors that report to the main reporting agencies. This is something that you can ask your existing and future suppliers.
Building Business Credit Quickly and Easily
- Pay Bills On Time – If you can, pay them early. Delinquent payments are one of the first things that lenders consider. Paying early leaves wiggle room for emergencies or unforeseen costs that may tie up your cash flow.
- Establish Trade Lines With Suppliers – As mentioned above, there are vendors that regularly report to the main credit reporting agencies. Work with these vendors to set payment terms that, when honored and paid in a timely manner, will reflect positively on your score.
- Focus On Your Overall Utilization – Try to keep your utilization below 30% across all cards and accounts, but the lower the better. Pay off your balances as often as you can. Having multiple cards can also improve your overall utilization, but don’t do so if you are unable to keep balances close to zero or make all of your minimum payments.
The age of your accounts also affects your score. As a result, it’s best to begin taking these steps sooner rather than later.
Frequently Asked Questions
Does my personal credit score affect my business credit score?
It can. Some lenders consider the personal score of the owner when reviewing loan applications. On the flip side, your business activities can also affect your personal score, such as when you apply for a business card for the first time.
How do I check my business credit score?
The three main reporting bureaus you want to keep an eye on are Dun & Bradstreet, Equifax, and Experian.
Checking your score with these sites is not free and, while there are many sites that give you summaries and snippets of information about your scores, it’s nearly impossible to get a copy of all the data behind your score at no cost.
Despite this, it is well worth the cost to check your score at least once a year to understand where your entity stands. You should check periodically depending on your level of financial activity and the frequency with which you apply for loans.
You Don’t Have to Grow Your Business Alone
Starting your own venture can be scary. Legal intricacies and lack of experience can be overwhelming and turn many would-be entrepreneurs away from making that leap.
The Black Business Council is a Montgomery County, Maryland-based organization that is here to give you a boost to jump those hurdles. As a community of entrepreneurs with similar mindsets and goals, we are able to harness our cumulative experiences, perspectives, and knowledge to create a supportive environment where each founder builds a foundation for success. Learn more and become a member of our community.