The Importance of Establishing a Business Credit Score

Last Update: February 7, 2021 • Business Loans • Credit Report • Loans •

Business credit is very similar to personal credit, but there are some differences. Today we will discuss them. Like personal credit is important for a person, business credit is important to a business. A high business credit score and an excellent financial track record could give you access to hundreds of thousands if not millions of dollars. There are business loans of up to 10 million. It’s not typical for individuals, even those with high income, to get over $100,000 unsecured loans.

If you run a business and know what you are doing, a good business loan can totally change your business and life. For this, you have to have a good business credit score.

Business Credit is Important for Several Reasons

It allows you to separate personal expenses from business expenses

This is important for many reasons. The most obvious is accounting, which will be much easier to manage. Tracking expenses throughout the year will make tax season less stressful for you and your accountant. Having business credit and keeping all business expenses separate from your personal also means that your personal credit wouldn’t be affected even if your business runs into financial trouble.

It will give you much higher capacity when you want funding

If your business needs a loan, the capacity available to you will be significantly higher when applying as a business rather than applying as an individual. According to the SBA (U.S. Small Business Administration), businesses tend to receive 10 to 100 times more credit capacity than individuals.

It allows you to get better terms when you lease or finance

When you want a new company car for your business, you will get the best terms. Low down payment, low-interest rates, and great repayment terms are other business loan perks. If you are interested in these, read on. You have to create high business credit.

It increases the value of your business should you ever want to sell

When a potential buyer wants to buy your company, they will also look at your business credit report. If your business has a credit line of $500k and another business they are looking at has access to $5M in funding, that could definitely be a selling point for the other company.

How Does Business Credit Differ from Personal Credit?

To start with, business credit is scored on a scale of 0 to 100, while personal credit is scored on a scale of 300 to 850. More is always better. A score above 70 is considered good for a business. For individuals to be considered good, this number is 700.

Several business credit factors differ from personal credits. Here are they:

Your business’s demographic, business size, years in business, and the SIC code (or Standard Industrial Classification, which is basically the category of business you are in).
Legal complaints against your business.
The three reporting bureaus are not the same as for business credit. Equifax, Experian, and Dun & Bradstreet (D&B) are the bureaus that report business credits. Transunion doesn’t.

How Long Does Financial Information Stay on My Business Credit Report?

According to Experian:

Trade data – 3 years.
Bank, government, and leasing data – 3 years.
Uniform Commercial Code filings – 5 years.
Collections – 6 years, 9 months.
Judgments – 6 years, 9 months.
Tax liens – 6 years, 9 months.
Bankruptcies – 9 years, 9 months.

How Do I Establish Business Credit?

Now you understand the basics of business credit and the importance of establishing it, and you might ask how to increase my business credit. We have important tips for you.

Incorporate your business. Your business must be incorporation or LLC to obtain business credit.
Obtain an EIN. This can be obtained by applying to the IRS online.
Obtain a DUNS (Data Universal Numbering System) number through DNB.
Open a business checking account. Most banks will offer business checking accounts as an option (and many will give you free checks if you are persistent enough).
Check with all three credit bureaus to ensure that your business credit profile has been created.
Apply for a business credit card. This will be one of the best ways to start building your business credit.
Establish trade lines. If you buy supplies or inventory in your business, those purchases can help you build your business credit. Ask your suppliers to extend trade credit to you. This means you pay for items a specified number of days or weeks after receiving the inventory.
Lease equipment for your company. Many companies lease copy machines for their offices, which is a great place to start. As a new business, you may have to apply with your personal credit attached, often known as a “personal guarantee.” A long term lease is another excellent way to establish a great credit score.
Pay on time, every time. Don’t pay late. This is absolutely critical to keeping a squeaky clean business credit score.
Make sure your vendors report your payments to the three reporting bureaus. Some companies do not automatically report this data to the three reporting bureaus, so you should always ask. If they don’t, you may be able to submit this information to your credit profiles manually or find another vendor.
Work towards spending 100% of your business expenses through your business. It is crucial to stop spending personal money on business expenses. This may not be possible initially, but make this a goal you are working towards. It makes accounting, accountability, and taxes much less of a burden. This will have a very positive impact on your business credit score and will keep your personal assets protected.
Check your business credit reports often. Sign up for some business credit monitoring. Many business owners find errors in their reports. This negatively impacts their credit. Be vigilant about checking and quickly correcting any errors found.

Conclusion

Good business credit is critical to obtain. The main benefits are great financing terms, low-interest rates, and higher capacity funding. As your business grows and your ever-changing needs require you to obtain financing or new equipment, you will be happy to start building your business credit today. Like personal credit, building good business credit is a long process. So, don’t waste time. Start right now!