Give Your Business Some Credit

Even if you’re not planning to borrow money for a capital purchase any time soon, it’s smart to make sure your business is creditworthy.

Give Your Business Some Credit

Judy Kneiszel

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Entrepreneurs often use personal assets as startup capital and rely on their personal credit scores to secure startup loans. Once their businesses are up and running, however, wise owners separate personal and business finances. One way to do that is to build a good credit score for the business so future capital can be borrowed by the business, not the owner.

KEEP SEPARATION

If a rookie business owner isn’t convinced about the necessity of keeping personal and business finances separate, it will become clear at tax time. Separating personal and business finances makes tax preparation simpler because expenses are easier to track. And if business expenses are simple to track, it’s easier to take full advantage of available deductions. Separation of finances also gives a new business credibility while reducing personal liability.

What some business owners don’t realize is that business credit is also an important reason to separate personal and business finances. Having personal and business finances together makes it difficult to establish business credit because a bank or lending agency can’t easily isolate business income, which is the number a lender needs when assessing whether or not to approve a business loan.

Taking out personal loans to operate a business can negatively impact a business owner’s entire family because any repayment problems show up on the business owner’s personal credit reports. This will make it harder to borrow money for a family home or car. Even if there aren’t problems, a personal loan used to fund a business can hinder the ability to borrow as an individual because lenders limit how much can be borrowed based on both income and existing debt. Borrowing for a business can quickly bring the borrower to the limit.

Also, unless business credit is established, lenders will require a personal guarantee. That means putting assets such as your home on the line as collateral for the loan. This could make it difficult to move or refinance a home.

TRANSPARENT SCORES

Keep in mind that while personal credit scores are confidential, business credit scores are not. Anyone, including suppliers and potential customers, can check out your business score, which means having a favorable one can make day-to-day operations easier. Suppliers, for example, are likely to give a business more time for repayment if it has a good credit score.

A good credit score is also a sales tool. A potential customer considering giving your company the portable restroom contract for a huge event two years from now wants to know you’ll still be in business when the event rolls around. Likewise, a longtime customer might hesitate to renew a contract if he or she discovers your company has a low credit score because that could indicate instability.

Another benefit of a business having good credit is that credit scores are often used to help commercial landlords decide if they want to rent to a particular company. And, of course, the main benefit of a good business credit score is that when you do want to borrow money, you’ll get more favorable rates. Interest rates are, in part, based on the amount of risk the lender is taking on. And finally, having good business credit may also qualify you for lower business insurance rates.

CREDIT CHECKUP

A business credit score is similar to a personal credit score like the well-known FICO score. There are differences, however. Personal FICO scores range from 300 to 850; business credit scores generally range from zero to 100. While FICO algorithms are used to calculate scores by several consumer credit bureaus, business credit scores can vary from bureau to bureau because they don’t use the same algorithms.

Dun & Bradstreet, Equifax and Experian are the three major business credit bureaus. You can go to their websites to check if your business is in their databases. If you discover there are no reports on your company with these bureaus, they can assist you in setting up your profile.

Another key difference is that you can get your personal credit report free once a year from each of the three major consumer credit bureaus: TransUnion, Equifax and Experian. Plus, you can probably get your personal FICO scores free from your credit card issuer. It’s likely you’ll have to pay to see your company’s information, however, with the price of getting a business credit report from one of the three major bureaus ranging from $40 to $100. All three provide a credit summary and business credit score. Beyond those two things, there are slight differences in the type of information provided. Their websites should help you decide which bureau reports you want to purchase.

Remember, business credit reports are public, which means anyone can pay to see yours. On the other hand, you can get information on other companies as long as you are willing to pay for it.

IMPROVE YOUR SCORE

To build business credit, you want to maintain a good credit score or improve a mediocre one. One way to do this is to use credit responsively. Ask vendors to allow you to pay several days or weeks after you receive inventory and report your payments to a business credit bureau. Having that type of accounts-payable relationship with two or three vendors, even small ones, can improve your credit as long as you are fastidious about making payments on time, or even early, with all of your creditors.

Use as many lines of credit as you can, since more history is better. Be careful not to max out business credit cards, but rather limit spending to 20 or 30 percent of the established limit.

Taking out a small-business loan and making on-time payments can improve your credit score. Just make sure the lender actually reports to the credit bureaus, or you won’t be rewarded for your efforts. Most banks do report, but some smaller lenders do not, so always check.

A good credit score doesn’t happen overnight, especially if you’ve had a rocky business history. While it helps to pay off your business credit cards on time each month, things like bankruptcies, liens, and judgments against the business in collections lawsuits stay in credit reports for seven to 10 years, having a continued negative affect on credit scores. Keeping your public records clean is crucial to establishing good credit.

ENSURE ACCURACY

Keep information about your company up to date with the three major credit bureaus, and check your credit reports for accuracy at least once a year. Despite claims of careful vetting by the bureaus, mistakes sometimes get through. If you can provide evidence that information is inaccurate, the bureaus will correct the error.



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