Business Credit for Dummies and Noobs

Don’t worry if you have no idea what business credit is. Most new business owners aren’t 100% sure what it is, or how they can benefit from it. In fact, most people don’t know that your business will even have a credit score. 

Building your business credit rating is essential, just like your personal credit rating - you want to have one that is in good standing. You can use companies that offer net 30 terms to start building early, and explore option.

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Most people bootstrap their start-up, and because they are looking to keep costs low, they rarely look at credit options until much later, which means it is harder to get bigger credit offers.

Just like a good personal credit score, a business credit score will give you easier access to financing, protect your own credit and increase the value of your company. 

So here are some of the questions you might have right now about business credit. 

What Is Business Credit?

Business credit is a record of all of the financial responsibilities your company has. It is used by banks, investors, and commercial organizations to decide if your business is a safe candidate to lend money to, or even do business with. 

There are multiple agencies that will calculate your business credit score. Each agency will have different calculation methods, but generally, this ranking will go from 0 to 100. The higher the number, the lower your risk. Maintaining a score of 80 or higher is typically what you would like to aim for.

Why is it Important?

Having a robust business credit will help you grow your business. Most banks, companies, and investors will rely on your business creditworthiness when selecting loan terms that suit your business. 

It will also go some way to determining your insurance premiums, and if they should increase your line of credit or not. It may also be used when businesses are considering you as a viable business partner.

It is often the case that delayed financing, or insufficient funding is one of the most common reasons for business is to fail. 

However, because anyone can view your business credit score as it’s not confidential, it is essential to establish business credit from the opening day, so you have a track record lenders can use. 

As a small business owner, you should know that separating your business credit and personal credit is vital. 

Think of your business credit as the wall which will divide your business decisions from your personal choices and those your credit history too. Business credit will be linked to your business entity and a separate tax ID number. It is not linked to your personal social security number.

By having the separation, you can remove potential funding obstacles that may stop your business is growing in the future. It will also help to limit your personal liability why you are running the company. So your own credit will be protected in the event your business closes or has a lot of debt.

How is business Credit Calculated?

Large credit bureaus like Experian and Equifax calculate business credit scores. They do use slightly different methods to do this.

• For example, experience uses intelliscore Plus this statistic based credit score which has a 1 to 100 range. They take multiple factors into consideration, such as: 

  • years in business, 

  • how many credit lines opened

  • payment history.

• Equifax compiles three different factors to determine the risk level of your business.  

  • Credit risk which considers the likelihood of your business becoming severely delinquent, i.e. not paying on time, 

  • Business failure score which is the likelihood of your business closing, 

  • Payment index which is reflective of you making payments on time.

Building Your Business Credit

If you have applied for a loan, are leasing office space, or even incorporated your business, you would likely already have a credit profile. You can search for your business via one of the credit agencies or check NAV where you can view some reports for free, or you can subscribe for a full report.

It is recommended that you check your business credit report at least twice a year. You can then look for errors or missing financial data and make corrections. 

And remember just like your personal credit - missed payments, slow increase of debt, or late collections on your business profile will trigger a low credit score. 

To ensure you have strong business credit, you need to pay your bills on time, build a positive payment history and update files to ensure accuracy. Take smaller lines of credit to start building up your business credit record, and before you know it, you’ll have a high score.