If you’re a new business owner, you probably don’t know how to open a business credit file for your company – or why it is important to do so. Even though you might understand how personal credit works, building solid business credit scores that can help your company thrive and grow is different. It takes time to build and maintain a good business credit report. Here are some things you should know about business scoring.
Establish business credit: First, according to Experian, you must file your business with your state by forming a corporation or LLC to operate your business and obtain a FIN or EIN number from the IRS. You should also obtain all necessary licenses to meet state and federal requirements for your business. And, establish accounts under your business name, such as a business checking account, utilities, leases and loans. It is also a good idea to craft a professional business plan and prepare financial statements. Finally, find companies who will grant credit to your business without a personal guarantee. And while it is important to have one, don’t rely solely on small business credit cards for access to credit. Your business credit profile should be broader than that. Finally, be sure you borrow and then pay on time. If you properly manage your finances from the start, you will be well on your way to establishing good business credit.
Pay on time — or in advance: While it seems to go without saying, it’s worth reinforcing how important it is to remain current on all payments to creditors. Don’t let them go delinquent. Period.
Keep your business and personal finances separate: In a nutshell, if your business becomes financially at risk, so does your personal credit score. By maintaining separation, you can protect your personal credit profile should your company encounter financial difficulties, and vice versa. This will also help your business gain the credibility that matters the lenders, vendors and partners.
Work with vendors that report payments to the business credit bureaus: You must make sure your good payment behavior is reported. So, open accounts with companies who report your payment history to the credit reporting agencies and ask anyone who has extended credit to your business to report your payment history to the three major commercial credit bureaus Dun & Bradstreet, Experian and Equifax.
Ask for terms: Vendor credit is a kind of short-term credit your company may receive from suppliers or service providers, allowing your company to buy now and pay later for the things it needs to stay in business. A net 90 vendor account refers to the length of time a vendor gives you to make your payment – meaning you don’t have to pay for the goods or services you receive for 90 days (though early payment discount are sometimes offered if you make your payment sooner). Vendor accounts are an easy way to build credit. However, net 30 accounts are easier to find and qualify for than net 90 terms, especially for startups. You may even be able to open a net 30 account with no personal credit check and no personal guarantee. In any event, vendor credit is certainly worth exploring is you need a little extra time to pay your invoices.
Don’t use too much credit: Credit equals debt. And, while debt is usually a necessary tool to start a business, it’s important that you make sure your debt isn’t working against you. When most of a business’ expenses are leveraged for servicing debt as opposed to investing in the business, that’s when real financial difficulties can take hold. The more credit you take on, the more debt you have. So, try not to use more than 30% of your credit limit consistently. It will demonstrate responsible borrowing and help build relationships with lenders.
Check on your scores regularly: You should always be aware of what’s in your business credit report and know your business credit score. Creditors will use your business credit report to make important financial decisions about your company – how much to money to loan you, how much credit to extend, and what interest rates to charge you. After all, knowledge is power. So, check your report and score often. You can even sign up for alerts to warn you of changes that might indicate your business credit information is being used fraudulently.
Fix errors on your business credit report: Errors won’t correct themselves so make sure that you pay attention to any old information and have it corrected.
When you put the time and effort necessary into establishing, building and maintaining a good business credit report and score, you’ll enhance your company’s business’ reputation and position it for success.