When it comes to running a successful business, managing your finances effectively is paramount. One crucial aspect of financial management is building and maintaining a solid business credit profile. In this comprehensive guide, we’ll explore what business credit is, why it’s essential, how to build it, and tips for maintaining it.
Table of Contents
What is Business Credit?
Business credit, also known as corporate credit, is a financial system that assesses and evaluates a company’s creditworthiness and financial responsibility. It’s akin to a reputation score for your business, determining how trustworthy and reliable your company is in managing its financial obligations. Business credit is the financial reputation of your company. It’s a numerical representation of your business’s creditworthiness. It is separate from personal credit and is tied to your business entity.
Why is Business Credit Important?
The importance of business credit cannot be overstated. Here’s why it matters:
- Access to Financing: Lenders often rely on your business credit score when deciding whether to extend loans or lines of credit. A strong credit profile can lead to more favorable borrowing terms and lower interest rates.
- Supplier Relationships: Strong business credit can help you negotiate better terms with suppliers. This can lead to extended payment windows, helping with cash flow management.
- Attracting Investors: Investors are more likely to consider your business if it has a robust credit history. This can be particularly important for startups seeking external funding.
- Insurance and Contracts: Business credit can impact insurance premiums and contract negotiations. A positive credit profile may lead to lower insurance costs and more favorable contractual terms.
What Do Businesses Use Credit For?
Businesses utilize credit for various purposes, including:
- Expanding Operations: Funding expansion projects, opening new locations, or entering new markets often requires substantial capital.
- Inventory Purchases: Maintaining adequate inventory levels is crucial for many businesses. Credit can help cover these costs.
- Operational Expenses: Covering day-to-day operating expenses, such as salaries and utilities, is more manageable with access to credit.
- Investment in Projects and Equipment: Funding special projects or acquiring essential equipment can be achieved through credit.
Credit Reporting Agencies
Business credit information is tracked and reported by commercial credit bureaus, such as Dun & Bradstreet (D&B), Experian Business, and Equifax Business. These specialized agencies gather data on businesses, including payment histories, credit utilization, and public records, to create comprehensive credit reports and scores. Lenders, suppliers, and other entities use these reports to assess the creditworthiness of a business.
Business Credit vs. Personal Credit – What’s the Difference?
An essential aspect of business credit is its separation from personal credit. While personal credit is tied to an individual’s financial history, business credit is associated with the business entity itself. This separation means that a company can establish its credit history, distinct from the personal credit scores of its owners or founders. It’s essential to differentiate between business and personal credit. Business credit is associated with your company’s financial activities and is not linked to your personal finances. Here are some key distinctions:
- Entity Separation: Business credit is tied to your business’s legal entity, which means it can develop its own credit history, separate from personal credit scores.
- Credit Reporting Agencies: Personal credit is monitored by agencies like Equifax, Experian, and TransUnion. In contrast, business credit is tracked by commercial credit bureaus like Dun & Bradstreet (D&B), Experian Business, and Equifax Business.
- Liability: Business credit often requires a personal guarantee for startups or businesses with limited credit history. This means the owner is personally responsible if the business defaults on credit obligations.
How to Build Business Credit
Building business credit is a deliberate and strategic process. Here’s a step-by-step guide to help you get started:
1. Register EIN (Employer Identification Number)
- Obtain an Employer Identification Number (EIN) from the IRS. This unique identifier distinguishes your business from your personal finances and is essential for building business credit. You can register for your EIN online and receive your EIN instantly.
2. Get D-U-N-S Number
- Register for a Dun & Bradstreet (D&B) Data Universal Numbering System (D-U-N-S) number. This globally recognized identifier helps establish your business’s credit profile. The D-U-N-S number is the equivalent to a social security number for businesses. Companies that report to DUN & Bradstreet will use your D-U-N-S number to do so. Receiving a D-U-N-S is free however it takes some time to receive your number. DUN & Bradstreet offers pay options for expedited D-U-N-S numbers. If you need your D-U-N-S fast, you can pay and receive it within 8 business days. Normal delivery time is approximately 30 business days.
3. Open Trade (Net) Accounts
- Establish trade credit by working with suppliers that offer extended payment terms. Paying vendors within these terms can positively impact your credit score. Typically suppliers or vendors will off these terms in the form of Net days. Net days is simply the amount of days that you have to pay the invoice. Suppliers and/or vendors can offer terms as short as 7 days or as long as 90 days. Typically, the net number of days is shorter when first establishing a relationship with the supplier. Once a relationship is established, the supplier/vendor may decide to extend the amount of days before payment is due.
4. Open Business Credit Cards
- Apply for business credit cards and manage them responsibly. These cards can help you build credit quickly, provided you make on-time payments and manage your balances effectively. Many businesses including Office Depot and Wells Fargo offer business credit cards.
5. Building Relationships with Financial Institutions
- Establish and nurture relationships with banks and financial institutions. These institutions can offer various financial products and services that can benefit your business. Take time to get to know the key people at your financial institutions as well as the key people who handle your vendor accounts.
6. Pay Vendors Early or On Time
- Timely payments to suppliers and creditors demonstrate your reliability and positively impact your credit profile. We recommend paying all of your vendors early. You will establish trust early on by doing so. Try to avoid making any late payments.
7. Look for New Trade Lines
- Continuously seek opportunities to establish new credit relationships and diversify your credit portfolio. New products and services are launching all of the time. Keep an eye out for new financial products that may serve your company’s needs. You never know when your company might need or want funding and It is better to have knowledge of the resources available to you before this time arrives.
8. Dispute Any Inaccuracies
- Regularly review your business credit report and dispute any errors or inaccuracies. A clean credit history is essential for maintaining a strong credit profile.
Credit Monitoring Services
Business credit monitoring services play a pivotal role in empowering businesses to actively manage their credit profiles. These services offer comprehensive tools and resources that allow companies to monitor their own credit health proactively. Through regular access to credit reports, scores, and alerts, businesses can stay informed about their credit status, track changes, and identify potential issues. This proactive approach enables businesses to take timely corrective actions, maintain a positive credit history, and make informed financial decisions. In essence, business credit monitoring services are invaluable allies for businesses, helping them safeguard their financial reputation and navigate the complex landscape of credit management with confidence. Several companies monitor business credit. Some of the prominent ones include:
- Dun & Bradstreet (D&B): D&B is one of the most well-known business credit reporting agencies. They provide businesses with a D-U-N-S number, a unique identifier used for tracking a company’s credit history. D&B offers various credit reporting and monitoring services.
- Experian Business: Experian, a major consumer credit reporting agency, also offers services for businesses. They provide business credit reports and scores, helping companies track and manage their creditworthiness.
- Creditsafe: Creditsafe is a global business credit reporting company that offers credit reports, scores, and monitoring services for businesses of all sizes. They provide data on international companies as well.
- Nav: Nav is an online platform that helps businesses monitor and manage their credit profiles. They offer free business credit scores and reports, as well as premium services for more comprehensive monitoring.
These companies play a vital role in assessing and monitoring the creditworthiness of businesses, helping them make informed financial decisions, secure financing, and manage their credit effectively. Businesses often choose one or more of these providers based on their specific needs and preferences.
Credit-Building Strategies for Startups
For startups, building business credit can be particularly challenging since you lack an established credit history. Here are specific strategies:
- Use Personal Guarantees: Be prepared to provide a personal guarantee to secure credit initially. This means you’re personally responsible if the business defaults. As your business credit strengthens, you can reduce reliance on personal guarantees.
- Start Small: Begin with small credit lines or trade accounts to establish a credit history. Gradually increase your credit limits as your business grows and demonstrates responsible credit management.
- Build Relationships: Nurture relationships with suppliers and vendors. Over time, they may be more willing to extend favorable credit terms.
Companies Who Report To Credit Agencies
Here are some specific examples of companies that often report business credit information to credit bureaus:
- Office Depot: Office Depot and similar office supply companies may report payment histories of business customers who have credit accounts with them.
- Wells Fargo: Wells Fargo, a major bank, reports business credit information for clients who have business loans, lines of credit, or business credit cards with them.
- American Express: American Express reports payment data for business credit card holders, impacting their business credit profiles.
- Caterpillar Financial Services: This subsidiary of Caterpillar Inc. provides financing for heavy machinery and equipment. They often report payment data for business customers.
- Staples: Staples, another office supply retailer, may report payment histories for businesses with credit accounts.
- AT&T: Telecommunications companies like AT&T may report payment information for business accounts, including phone and internet services.
- Dun & Bradstreet: D&B is not just a credit bureau but also a company that collects and provides business credit information. They gather data from various sources, including trade creditors and suppliers.
- ExxonMobil: ExxonMobil often reports payment data for commercial fuel and energy accounts.
- Verizon: Similar to AT&T, Verizon may report payment data for business customers using their telecommunications services.
- Enterprise Rent-A-Car: Vehicle rental companies like Enterprise may report payment information for business accounts renting vehicles.
Remember that the specific companies reporting payment data can vary, and not all businesses report to credit bureaus. It’s important for businesses to inquire with their creditors and
suppliers about their credit reporting practices if they are looking to build or improve their business credit profiles.
Conclusion
In conclusion, building and maintaining business credit is a critical aspect of financial management for any company. By understanding the nuances of business credit, following a strategic plan, and consistently managing your credit profile, you can position your business for growth and financial success.
Remember that building business credit is not a sprint but a marathon. Be patient, monitor your credit regularly, and adapt your strategy as your business evolves. With dedication and sound financial management, your business can achieve a strong credit profile that opens doors to numerous opportunities.
