Building Your Business Credit Profile The Right Way
By Gwen Moran
When it comes to growing your business, co-mingling personal and business credit is risky. If the business goes bust, your personal credit score will suffer. Conversely, if your personal record isn’t stellar, your business may not be able to get loans or supplier credit.
While the recession has made it harder to avoid personal guarantees for business credit, building a strong business credit profile is still important. It can help you prove to lenders and investors that your business is a good credit risk when the time does come for a loan or line of credit. And it may help you borrow at a lower interest rate.
Don’t know where to begin? Follow these key steps to launch a solid business credit record.
1. Get your numbers. One of the first things you should do after establishing your company as a corporation, partnership or even a sole proprietorship, is to ensure that your firm and its Employer Identification Number are listed with Dun & Bradstreet. The company will issue your business a profile and an identifier using the Data Universal Numbering System (DUNS). You get a unique, nine-digit DUNS number for each physical location of your business. This is the start of your business credit profile, says Ryan Boatsman, CPA and partner at accounting and business advisory firm DeLap in Lake Oswego, Ore.
Banks and creditors use this number to check your company’s creditworthiness. Experian, TransUnion and Equifax also have small-business divisions, but D&B’s service is the most widely used. The D&B credit score is called a Paydex score and ranges from 1 to 100. Boatsman says an 80 or above is considered good credit — roughly the equivalent of a 750 personal FICO score.
2. Open utility accounts. When you can prove that you’ve paid a wide variety of creditors on time, you’re a better risk in lenders’ eyes, Boatsman says. Open utility and service accounts such as electric, gas and telephone service in your company’s name even if it requires a small security deposit, advises Michelle Dunn, author of “Credit and Collections: A Business Perspective.” Those payments may not end up on your credit record, but you can provide proof of regular, on-time payments, such as copies of checks, as part of an application to prospective lenders.
3. Build supplier credit. Apply for credit terms with suppliers, which may be easier to get than lines of credit or bank loans, Dunn says. Suppliers may offer your business a limited credit line with 30- or 60-day payment terms or small discounts for early remittance.
As you make timely payments, your credit limit may increase. Dunn advises urging those suppliers to report timely payments to credit bureaus, as that will help build the business credit profile. A strong profile will also help you more easily land future supplier credit, which can be an important cash flow preserver.
4. Borrow from the bank — responsibly. While many business owners think that a small-business credit card is a good way to begin building business credit, you may have better options, Dunn says. Small-business credit cards are often issued based on the business owner’s personal credit, but are not subject to the CARD Act of 2009, which protects consumers from arbitrary interest rate increases, unreasonable fees and other costly practices.
Instead, Boatsman suggests applying for a line of credit or small bank loan and paying it in a timely manner. A good place to start is the bank with which you have your business checking account, since you have a financial history there. Community banks and credit unions that offer business services may also offer more favorable interest rates and easier lending terms than large commercial banks, Boatsman adds.
5. Pay on time or early. The sooner you pay your bills, the better your business credit score will be. On the Paydex scale, 100 is reserved for businesses that pay 30 days before the due date. A score below 20 means the business pays 120 days or more after payments are due.
Another incentive for paying early: some creditors offer a discount if you pay within 10 days. That offers the double advantage of improving your credit score and putting money back in your pocket, Boatsman says.
6. Pay down balances. Just as high credit balances can affect your personal credit score, they also affect your business credit score, Dunn says. Your ratio of debt to available credit should ideally be one-third or less.
7. Keep an eye on your profile. Mistakes happen on business profiles as well as on personal profiles, and a few erroneous reports can drop your business credit score dramatically, Boatsman says. He advises checking your business profile annually as well as at least 60 days before you apply for new credit to ensure you have time to correct any mistakes or inaccuracies you find.
8. Revisit terms and guarantees. While some lenders may require personal guarantees on loans and lines of credit, especially if you’re a small or relatively new business, a strong business credit profile may ultimately relieve you of that obligation. As your profile improves, work with your lender to determine if those guarantees can be released or if you can obtain a better interest rate. The latter could save your business a significant amount of money. According to the Small Business Administration, reducing the interest rate on a $100,000 line of credit from a 13 percent to 7 percent could save you tens of thousands in interest charges over time.
Small-business owners who take care to establish separate credit profiles for their businesses show strong management acumen to prospective lenders, Boatsman says. With on-time payments and vigilance in monitoring your business credit profile, your business can have greater cash flow protection through vendor credit terms and easier, cheaper access to the finances you need to maintain and grow your business.