Establishing Business Credit: The Seven Steps to Success

Business Credit vs. Personal Credit:

Staff – Building personal credit begins when a person provides their social security number and applies for their first credit card. At that time a credit profile is started with the personal credit reporting agencies in the region of the country in which they reside. This profile, also commonly known as a “credit report,” is created with every credit inquiry, credit application submitted, address change, and job change. The information contained in the report is generally reported to the credit bureaus by those companies that issue credit. Eventually, the credit report is seen as a statement or report of an individual’s ability to repay a debt and is the key tool for accessing and granting credit.

Business – When a company issues other commercial credit, it is called commercial credit (seller or supplier credit). Business, or trade, credit is the largest single source of loans in the world, but most small businesses typically don’t report it to business credit bureaus. Data related to business credit transactions must be submitted and then aggregated by business credit bureaus to create a business credit report using business name, address, and Federal Tax Identification Number (FIN). Credit bureaus use this data to generate a historical report on a company’s business credit transactions and payment history. Credit-issuing businesses generally use your business credit report to determine how much credit they’re willing to extend and the amount of your credit limit. Additionally, many businesses (suppliers/vendors) will submit credit reference requests to key business vendors as a method of obtaining payment patterns as part of the credit granting process.

The main credit bureaus are:

• Dun & Bradstreet
• US trade credit
• CorporateExperian
• Equifax for small businesses
• TransUnion (Staff)

Information provided to commercial credit bureaus (mainly D&B) is submitted on a voluntary basis, as companies are not required to report. Therefore, credit bureaus may never receive information about credit business transactions and a business could spend years building up a business history without reporting to the credit bureaus and establishing a positive business history of sound credit practices.

Establishing business credit history:

Business credit scores range on a scale from 0 to 100, with 75 or higher being considered an excellent score. Personal credit scores, on the other hand, range from 300 to 850, and a score of 680 or higher is considered excellent. With today’s tighter credit scrutiny, the higher the credit score, the more likely a person or business will get credit, and on more favorable terms (interest rate and length of contract).

While it is important to know that there are many http://www.myfico.com factors that affect a credit score; it’s based on more than just whether you pay your bills on time (still very important). Your credit score will be affected by the amount of available credit you have in bank lines of credit and credit cards, how long you’ve had a credit profile, the number of inquiries made to your credit profile, payment of bills on time. , bankruptcy, as well as other considerations.

The typical American consumer’s credit report receives two to three credit inquiries per year and typically has 11 credit obligations, typically divided into 7 credit cards and 4 installment loans. Business owners are not the typical consumer, because they have both personal and business credit. This typically doubles the number of inquiries made to your personal credit profile and the number of credit obligations you have at any given time, all of which have a negative impact on your personal credit score. Also, because business inquiries and personal inquiries are not separated on the personal credit report, personal credit scores are negatively affected. As mentioned above, by using personal credit history to obtain credit for your business, businesses cannot build your business history/score, all of which could help you obtain critical business credit in the future.

A critical mistake many business owners make is using your personal information to apply for business credit, leases, and loans. This practice has the resulting impact of potentially lowering your personal credit score, while creating neither a business credit history nor a business credit score.

One key to establishing business credit and a profile and score is to find companies (UPS, FEDEX, etc.) or your key supplier and vendors that will extend credit for your business without using your personal credit information and then report payment experiences. . to business credit bureaus. By reporting the information to the appropriate credit bureaus, those companies will help the business establish a business credit profile and score.

The seven steps to success:

1. Legal Structure of the Company – The business must be a legal entity in itself in order to establish business credit. Therefore, it is recommended to form a corporation (C Corp) or LLC (discuss with your CPA the advantages/disadvantages of a C Corp versus LLC) rather than structuring your business as a sole proprietorship or partnership. Forming a sole proprietorship or partnership dictates that personal credit information may be included in the business credit report. Additionally, as a sole proprietor or partner in a partnership, you are personally liable for the company’s debts and all of your personal assets are at risk in the event of litigation.

Corporations and LLCs, on the other hand, provide liability protection for business owners and can create a business credit profile that is separate from the personal credit profile. So apply for credit in your business name and find businesses willing to extend credit without a personal credit check or guarantee.

2. Register with Business Credit Agencies – The best known business credit bureau is Dun & Bradstreet. Dun & Bradstreet has a process on their website for establishing a DUNS number (a specific 9-digit number related to your business) and instructions on how to establish a business credit score. It is strongly recommended that you contact D&B and follow their process for establishing business credit. The following is from the D&B website:

How do I get started with D&B? With our second-to-none global data collection system, D&B continuously collects the data that initiates the creation of business credit profiles on new businesses. Many types of activities can trigger a profile on a new company, such as incorporating your business, applying for a loan, obtaining a business phone number, renting office space, even when another company searches for D&B information about your business. . Still, a new business may not have a complete business credit profile. Obtaining a DUNS number from D&B, the worldwide standard for business rating systems, is an essential part of helping you establish your business credit profile and will ensure that when a business searches for you in the D&B database, they will find you. In some cases, a D&B DUNS number is required to do business with certain entities, such as the US government.

You should make sure you have a D&B business credit profile if:

• You are planning to get a business loan
• You need to buy or lease equipment
• Your cash flow is tight
• You want to make sure you get a fair deal from lenders compared to your competition
• You want to pay net 30 days instead of COD (cash on delivery)
• You are paying interest on premium plus 1, or even more
• You plan to do business with entities that require a DUNS number, for example, the US government.

These problems and many others like them can be addressed by having a strong business credit profile. A good rating gives you the financial freedom to take the steps you need to grow, and is a direct and unbiased method for other businesses to assess your level of risk when considering accepting you as a creditor. A bad credit rating is a certain barrier to growth and success, preventing you from getting the right financing on fair terms.

Contacting D&B directly will help you establish your business credit in less time. If you’re a new business, D&B can help you build a complete business credit profile from scratch; If you’ve been in business for a while, you’ll want to improve and/or protect your business credit profile. Learn more about how to establish, monitor, improve, or protect your business credit.

3. Credit Market Requirements – Businesses must meet all credit market requirements to have a higher chance of being approved for credit, as failure to comply with the credit market can “send red flags” to both credit bureaus and potential credit grantors.

Some of the “signal flares” include:

• not have a business license,
• not be registered with the Secretary of State for a certificate of good standing,
• operating under your social security number instead of a FIN or EIN,
• not have a telephone line (landline) listed in the telephone directory with the exact legal name of the company,
• no website, or
• not have a business email address (not AOL or gmail, but a URL specific to your business).

4. Small Business Lines of Credit – Investigate and locate a minimum of five businesses (vendors/suppliers) willing to grant commercial credit without personal guarantees and report payment experiences to business credit bureaus. This will help your business establish a credit report and build a foundation of financial credit for the business. Find companies willing to extend credit that report to credit bureaus like marketingoncredit.com, UPS, FEDEX

5. Business credit cards – Obtain three business credit cards (Sam’s Club Discover Business card), that are not linked to you personally and that report business credit to the reporting agencies. So make sure you always pay your bills on time!

6. Financial Statements, Business Plans and Loan Packages – These documents are often required by many credit grantors as part of their loan application process. CxO To GO is a national professional services firm that has assisted many companies with the preparation of their financial statements and business plans. Additionally, CxO To Go has packages like PowerPlan and PowerPlan2 for business plans, PowerPuncher for executive summaries, CFOCast for financial projections, and BankSell for bank proposals for lenders and bankers to take action. It is important to note that 61% of all businesses are turned down for a loan due to a poor loan package; however, with BankSell, the lender’s loan package gets results and moves the applicant to the top of the list for credit committee review and approval.

7. Debt management – Be a smart money manager and manage debt levels to ensure they are not too burdensome and can be paid off with current cash flow. Don’t incur debts that over-leverage the business and cause missed or late payments.