By: Mary Hott, WV SBDC Business Coach
Most people know they need to track their personal credit score, but did you know your business also has a credit score that should be tracked? A recent Manta survey revealed that 72 percent of business owners didn’t realize they have a business credit score. And small business owners who understand their business credit are 41 percent more likely to be approved for a business loan.
Business credit report basics
The minute you start a business, credit bureaus begin to develop a business credit report on your company. They do this by scouring public records and other financial data. Then, when you receive a business loan or line of credit — sometimes called trade credit — information about your payment history is compiled by one of a few business credit reporting bureaus and providers, including Dun & Bradstreet, Experian, Equifax and FICO and turned into a business credit score.
Your business credit report includes only debts that are under your company’s federal tax identification number – also known as an employer identification number. Any personal lines of credit that you have are not listed on the report. This is true even for business credit cards that are still listed in your personal name. Information that is present on your credit report is voluntarily sent to the reporting bureaus from the businesses that own the debt. This means some lines of credit may not be listed on the report.
How business credit scores are used
Lenders and other creditors need a means of determining how well your business repays debts before they will approve you for financing. This is where business credit scores come in. Higher scores indicate to creditors that your business is more trustworthy, thereby improving the odds that it can obtain financing. There are a variety of ways your business credit data can affect your financing options:
- Bank Loans – all lenders have credit ranges you must meet to be approved for a loan
- Trade Credit – your suppliers and vendors can offer you 30-day, 60-day or 90-day repayment terms. The better your credit, the longer your term.
- Insurance Rates – the better your credit, the lower your various insurance rates could be
- Government Contracts – a poor score could cause you to be turned down for a contract opportunity
- Business Deals – entering a joint venture or partnership may require a review of your company’s credit history before signing
Checking your business credit score
As a business owner, you should review your company’s financial information on a regular basis, including your business credit scores & business credit reports. Your scores are fluid and can change over time. That’s why creditors tend to assess your creditworthiness on a continual basis. If you notice your trade credit scores are low, there could be an error in the business credit reports that caused an inaccurate calculation. It is also possible that your business does not have sufficient credit history to warrant higher scores. If you do find an error, contacting the credit agency that generated the score is key to getting a correction. If there aren’t any errors, you can still improve your business’s credit scores by making on-time payments and lowering the company’s credit utilization ratio, among other options, but it will take some time.
Improve your business credit score
Understanding how and when business credit scores are used can be confusing. Luckily, keeping your scores strong is something you can be proactive with. It’s a lot like taking care of your personal credit:
Separate your personal and business credit
Trade credit reporting is beneficial for helping you separate your business and personal finances, which is particularly advantageous in regard to credit. A business credit report offers a clear view into the financial standing of your business, providing you with a clean report of the company’s credit inquiries, lines of credit and delinquencies. This streamlined information makes it easier for fraud monitoring and for lenders to accurately assess.
Furthermore, separately listing business credit information protects your personal credit standing. Your company will typically have more annual inquiries and for larger lines of credit. If you keep your business and personal credit combined, these inquiries could hurt your credit score, but a trade credit report gives your business its own history to list your business’ credit activity.
Building a healthy business credit profile is one of the most important moves you can make as small business owner. Doing so opens up financing opportunities and business relationships that make it easier for you to run and grow a business.
Further information on business credit reports, including a free tool for checking your business credit score can be found at www.nav.com.