If you’ve tried to borrow money in the past for your business or for personal reasons, you’ve surely come across the notion of personal credit and a personal credit score. As a business owner, you may also have business credit. Lenders look at both personal and business credit in determining whether to lend you money. Here, we explain what business credit is and list 5 ways for you to establish and raise your business credit.
Personal vs. Business Credit
Many business owners understand how personal credit works but don’t give much thought to their business credit. Business credit, or trade credit, actually makes up a much larger percentage of credit transactions than personal credit. When a business (like a lending company) issues credit to another business, it can report the transaction and subsequent repayment history to business credit bureaus such as Experian Business and Dun & Bradstreet (D&B). These bureaus produce business credit reports and a business credit score.
Having good business credit helps you get the most desirable loans, such as low-interest-rate bank and SBA loans. Great business credit can independently support a business’s loan or credit application without regard to the personal creditworthiness of its owners. It can have other benefits too -- for example, lenders may not require a personal guarantee for a loan if you have great business credit. (See: Loans And Amortization -- Introduction To Loans.)
Increase Your Business Credit
- Ask Vendors to Report Business Credit History.
The more vendors that report a positive credit history to the business credit bureaus, the higher your business credit rating will be. Vendors are not required to report trade credit transactions to the business credit bureaus, but an increasing number of B2B lenders do report these transactions. We suggest working with lenders that report to the business credit agencies, particularly D&B (Dun and Bradstreet), which is the largest business credit bureau and carries the most clout with creditors.
- Keep Debt Levels Low.
Borrowing too much suggests that your business is struggling financially and can hurt your business credit score. High debt levels mean your business has less breathing room if revenues and profits decrease, and creditors don’t like to see this. Experian advises that you try to keep your debt level at 20 to 30 percent of your credit limit. This will help raise your business credit score.
- Make Timely Payments on Business Credit Cards and Loans.
Although it may seem obvious, one of the main things you can do to establish good business credit is to pay your business loans and credit card bills on time. Having a pattern of consistent and timely repayment on your existing debt helps you build trust with future creditors and helps you raise your business credit score. It will also help you avoid late fees and compounding interest. (See video: Understanding Compound Interest.)
If you’ve recently made a late payment or two, consider talking to the bank or lender and asking them to remove any late fees and withdrawing any information they provided to the business credit bureaus. But if you’re a regular late payer, it’s time to shape up and start paying those bills on time!
- Open At least A Couple Business Credit Accounts, and Don’t Close Unused Accounts.
No credit doesn’t necessarily mean good credit. In fact, having no credit makes it impossible for future creditors to accurately assess your business’ creditworthiness. You should have at least 1 or 2 sources of business credit, such as a business loan or business credit card. (See article: The Pros And Cons Of Small Business Credit Cards.)
If you’re having difficulty qualifying for a traditional commercial loan at first because of a low personal credit score, there are other options such as short-term alternative lenders and peer-to-peer lenders. At the very least, apply for a business store credit card, such as a Walmart or Staples credit card. (To find out more about peer-to-peer lending as a financing option, see article: Peer-To-Peer Lending Breaks Down Financial Borders.)
Once you’ve opened a couple business accounts, it will be easier to get more credit in the future.
If you open a business credit card, but aren’t using it that much, Experian still recommends that you keep the account open if you have a good relationship with the lender. The reason is that this increases your overall debt availability, which in turn increases your business credit. (For related reading, see article: Using Business Credit Cards Strategically.)
- Monitor Your Business Credit Report.
Gaining access to your business credit report isn’t as easy as obtaining your personal credit report. Unlike the case with personal credit reports, you’re not entitled to one free annual business credit report. However, there are ways to get your hands on it. First, if your application for a business loan was denied and the lender used your business credit report to make the decision, you have 90 days to request a copy of the report. Alternatively, you can pay a fee on D&B, Experian Business, or another business credit bureau website to see your business credit report.
If there’s a mistake on your business credit report, fix the error right away. If the lender won’t voluntarily correct the error, file a dispute with the credit bureau. The lender then has 30 days to verify the information in your file.
Both business credit and personal credit are important to your business’ financial health and ability to borrow money. If you haven’t given much attention to your business credit score, follow the 5 steps above to establish and increase your business credit.
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