Business owners make many investments in their companies. They buy equipment to improve operations, invest in ads to get more visibility and hire more workers for enhanced productivity. Some businesses can tap into their reserves to make these investments, but others get business loans for some of these expenses. Lenders won’t give their money to anyone and will do their research to avoid unfavorable scenarios. Financial institutions will check your business credit before letting you borrow funds. Understanding the importance of business credit and how to build it over time can help you save money and tap into more opportunities.
What is Business Credit?
Business credit gives lenders insight into how effectively you can manage debt. Lenders want this information before giving you a loan since their capital puts you in more debt. Banks only generate an ROI on their loans if business owners repay them fully. When lenders see applicants with high business scores, they feel more comfortable giving you money.
A personal credit card can help you with some loans, but personal credit has limitations. Lenders want to assess a company’s ability to repay debts, not just the founder’s ability to repay personal debt obligations. Business credit is like personal credit but specifically for your company.
Business credit scores also have a different structure from personal credit scores. While you can have a personal credit score from 300 to 850, small business owners have more business credit scoring systems with greater ranges. Here are the different types of business scores and their ranges:
- Dun & Bradstreet PAYDEX (0-100): Aim for a business credit score above 80
- Intelliscore Plus from Experian (0-100): Aim for a business credit score above 75
- Equifax Business Credit Report (101-992): Aim for a business credit score above 700
- FICO’s Small Business Score (0-300): Aim for a business credit score above 180
FICO is the golden standard for personal credit scores, but business owners have more choices. It’s best to start with the Dun & Bradstreet PAYDEX scoring method and look at the other ones later. A good business credit score for one major bureau usually translates into good credit scores using the other models since each scoring system uses similar methods with some nuances.
Why You Should Establish Business Credit
There are many benefits of having good business credit that can impact your bottom line and choices for financing. Many businesses borrow money from banks to fund short-term expenses and long-term investments. Establishing credit helps you get money from financial institutions, but credit building presents other benefits as well.
Separate Personal and Business Finances
Business owners borrow money for their companies, but some also need money for a mortgage or auto payment. Bundling all of these expenses into your personal credit can hurt your score. In addition, taking out business loans with your personal credit can impact your ability to get a personal loan in the future.
A business credit score helps you separate personal finances and business finances. You can also open a business bank account and apply for a business credit card to create a further wedge between your business and personal finances. One won’t impede the other, and you will have legal protection. A business owner can turn their brand into a limited liability company (LLC) to protect their personal assets in the event of legal action against the business. You will have to present your Social Security number and other documents to open business bank accounts and start your LLC.
Get Better Terms with Lenders and Suppliers
Lenders and suppliers like to work with business owners who have strong credit. They feel more confident in your ability to repay financial obligations and will reward you with more favorable loan terms. High-credit borrowers can save money on their lines of credit and loans. They also have more choices than their low-credit counterparts.
Qualify for Higher Loan Amounts
Some lenders will give you capital, but not enough for what you need. Business owners in this predicament may have to delay equipment purchases and hold off on vital assets. They may also have to seek other funding sources to make up the difference and risk getting into unfavorable loan terms.
Business owners with established credit have a better chance of getting the money they request. Lenders award high loan amounts to business owners with strong credit. Building your credit over time can help when you need money the most. If you build business credit, you will probably have an additional source you can use to obtain funds: your business credit card. Many business owners decide to open a business credit card when striving to build credit. This card can act as an additional lending source to cover any gaps, but using this card to build credit over time will help you qualify for the amount of money you need.
Get Cheaper Financing
A business credit score can help you secure cheaper financing than using personal credit for the same small business loans. Every business owner wants to save money, and establishing business credit lets you do just that. In addition, cheaper financing gives you more flexibility with cash flow and makes it easier to repay the loan.
Get Lower Interest Rates
Lenders set interest rates to earn returns on their investments. They charge higher rates for low-credit business owners to collect more money upfront to cushion the blow from a loan default. Lenders who give money to low-credit businesses have more control in that relationship since fewer financial institutions will accept low-credit applications. This dynamic lets them set higher interest rates. Payday and title loan lenders set the highest interest rates in the industry because their borrowers typically have no alternatives for financing.
When you have established business credit, you gain control. Lenders know you can walk away from them and get a loan from another bank. Lenders also recognize you are highly likely to keep up with monthly payments and provide them with the ROI they seek. They don’t want to lose business owners who can reliably pay loans. It’s an easy return on investment for them, and the lenders hope these business owners will take out more loans in the future. Banks will offer lower interest rates to persuade you to work with them instead of a competitor. The lower interest rates can save you thousands of dollars over the loan’s lifetime.
Pay Less for Business Insurance
You don’t need a business credit score to obtain business insurance, but a good score can lower your premiums. Insurers assess your credit score like lenders to make sure you can keep up with payments. They charge lower prices for business owners with high credit because they want reliable monthly payments. Insurers will charge more if you do not have established business credit. A bad credit score is a worst-case scenario. Insurers will set higher premiums for low-credit businesses to collect more money. Insurers want to squeeze out every last dollar before a low-credit business owner stops paying. If the low-credit business owner continues paying for years, it’s a nice bonus for the insurance company.
Insurance companies incur risk with each policy they write. Establishing business credit makes you a less risky candidate and results in lower premiums. Reducing expenses, no matter how big or small, can help your business. The increased positive cash flow makes it easier to pay workers, buy equipment, and keep up with financial obligations.
How to Build an Established Business Credit
You only get the wonderful perks of high credit if you build it over time. Business owners can use several strategies to build established business credit.
Register Your Business
Any LLC or S-Corp business must be officially registered with their state. You can still register your business with your state even if your business is not an LLC or S-Corp. You will need this business registration to start building business credit.
Get Your D-U-N-S Number
Credit bureaus use this number to identify your company so you can build a business credit profile. It’s free to request and obtain one of these numbers. In addition, you can apply for a D-U-N-S number on Dun & Bradstreet’s website.
Focus on Credit Utilization
Having a large gap between your debt and credit limit will positively impact your credit score. Credit utilization measures this difference, and a ratio below 30% will improve your score. For example, if you have a $100,000 credit limit, make sure you borrow less than $30,000 against your business credit card limit. You can improve your credit utilization by paying debt or getting a higher credit limit.
Pay Early or On Time
Payment history is the most important credit score category. Keeping up with debt payments will improve your score over time and help you qualify for better loans. Conversely, making late payments will negatively impact your score and hurt your ability to qualify for good loan terms. Fees and interest on the late debt can turn late payments into a bad habit that further hurts your credit score and finances. Only take on debt if you are confident in your ability to pay it early or on time.
You can make the minimum payment to stay in good standing, but interest will make the debt accumulate quickly. It’s best to pay off the balance at the end of each month. If you cannot repay the entire credit card debt, always pay more than the minimum so you get out of debt sooner.
Monitor Your Credit Reports
Business owners improve their revenue and earnings by tracking those numbers each year. Knowing last year’s earnings gives you a benchmark for the following year and inspiration to move in the right direction. Business owners extend this mentality with their credit scores. You can monitor credit reports to track your progress and use it as inspiration to build your score.
Checking your business credit report can also reveal errors that are unfairly dragging your score. If you detect any errors, you can file a dispute with the credit bureau to resolve the mistakes. These resolutions can help your credit score.
Credit reports can even reveal if you are a victim of identity theft. Some cyber criminals obtain people’s personal and business information and use those details to take out loans. If you spot any suspicious activity on your credit report, you can reach out to your bank and the appropriate personnel.
Wait Patiently for Your Business Credit to Age
Business credit, like other things, gets better with age. Multiple years of credit-building experience indicate to lenders that you have navigated more economic cycles and business challenges. Lenders have a deeper appreciation for businesses that persevere through those events and continue making on-time payments.
Patience is a virtue, and that truth holds firmly for business credit growth. Even the business credit card you haven’t touched in years will still improve your score. Most people should avoid closing their older credit cards because doing so will reduce the average age of their loans and lines of credit. While excessive annual fees can prompt some people to close an unused business credit card, it’s better to build your score with that card first. Every extra year puts your credit in a better position.
Work with Vendors and Suppliers Who Report Your Purchases
A business credit card does the heavy lifting for all of your purchases and repayments. However, you can still build your credit with purchases even if you do not have a business credit card. Some vendors and suppliers let you take out credit lines for purchases and report your payment history to the major credit reporting agencies. This activity can give your company a head start with building credit, and it can help you qualify for a better business card.
