Business Credit Scores: The Vital Statistics of Company Success

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There are distinct milestones that mark the transition from hobby to entrepreneurship. Among the most important is achieving good business credit scores. Initially, starting a business requires borrowing funds by any means to get it off the ground. But a professional business owner strives to keep personal and business finances separate rather than using personal credit to stay afloat.

Building a good company brand requires a strong commitment to offer quality goods and services. Equally important is being a consistently reliable business borrower. Initially, this may mean taking out a business loan or credit card with a personal guarantee. But over time, making timely payments will lead to establishing solid business credit with no personal asset guarantee. For the serious business owner, a good business score is almost as valuable as the business itself.

Topics:

 

– The Importance of Business Credit

– Business Credit Score Reporting

– Establishing and Building Credit

– Monitoring and Protecting

The Importance of Business Credit

Mostly all new business owners use their personal credit to get off the ground. Start-ups need cash for marketing, supplies, and other items that can’t wait. However, there are disadvantages to using personal finances and credit once the company is established. Signing as a personal guarantor on a business loan is almost like a cosigner; creditors go after the next person in line if a loan goes into default. Using individual credit puts personal assets at risk in the event of nonpayment.

Available credit in the business name creates a presence and is also viewed as sign of professional growth. It makes it easy and convenient to handle business expenses the moment they arise. Establishing good business credit comes with other important advantages, including:

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    Insurance premiums are lower for companies with strong business credit scores.

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    Like consumer credit, good business credit comes with lower interest rates.

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    Vendors offer better terms to businesses with good credit.

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    Finance approval for large-ticket items in the future is easier.

While it does take time to build business credit, it pays off with benefits like additional capital. With more borrowing power, a company with an established reputation for paying on time will be much more likely to get approval for a business loan in the event of expansion. Keeping personal finances apart also makes tracking business expenses easy and accurate for tax purposes. 

Business Credit Score Reporting

Anyone with a business credit card for their company probably already has a business credit score. For those who don’t, it helps to know how the scores are recorded and calculated. Consumer credit scores measure personal creditworthiness, which is expressed with a three-digit number generally between 300 and 850. Similarly, a business credit score is a snapshot of the company’s debt repayment history.

Lenders use information on business credit reports in the same manner as consumer reporting agencies. The higher the score, the better the chances for credit approval. However, methods of collecting, analyzing and reporting business credit varies. 

These are the primary differences between consumer and business credit reporting:

  • Consumer credit bureaus calculate scores using an industry algorithm (FICO) across all agencies. Business score algorithms vary among credit bureaus and do not follow an industry standard.
  • Business credit reports are publicly open to anyone who pays for a report. Personal credit reports can only be seen by the consumer or any parties to whom they give written permission.
  • Unlike consumer reports, there is no legal requirement for reporting bureaus to provide free annual access to business credit reports.
  • Many lenders check the personal credit file in addition to business credit score of applicants, especially with new businesses.
  • Unlike consumer reports, there is no legal requirement for reporting bureaus to provide free annual access to business credit reports.
  • Many lenders check the personal credit file in addition to business credit score of applicants, especially with new businesses.

Businesses have more than one credit score, the same as consumers. Agencies that report credit for businesses are FICO, Dun & Bradstreet, Experian, and Equifax. Additionally, there are reporting agencies that focus on special industries. Some vendors and lenders may use these reports to evaluate whether a business qualifies for credit. In all cases, competing agencies do sell business credit scores, just like consumer reporting agencies.

Establishing and Building Credit

A business owner cannot build business credit by using a personal credit card for company expenses. At best, making the payments on time will help with the individual’s credit score but do nothing to establish a credit file for the business. Additionally, a business line of credit will more than likely have a limit high enough to meet the expensive costs of running a business. 

The process of launching business credit starts with incorporating the business or forming an LLC (Limited Liability Corporation). This establishes the owner and the business as separate identities. The owner must then apply for an Employee Identification Number (EIN), which will be needed for tax filing. It is also the number that is associated with the business credit score. 

The owner should get a bank account and phone number listed in the legal business name. The next step is to use the EIN to register with Dun & Bradstreet, a corporation that provides commercial credit information around the globe. With all things in place, the business owner can work toward establishing a good credit score. This means the owner needs to:

  • Apply for a business credit card that has helpful rewards or benefits, even if the opening credit limit is small.
  • Open an account with a vendor that will report payments to credit agencies. 
  • Use business credit for cash flow management since higher business credit scores result in lower rates and better terms.
  • Pay vendors early in order to get the highest Dun & Bradstreet credit score.

In general, business credit scores are based on the same factors as consumer credit. Good credit, whether business or personal, is built up over time. A high business credit score is achieved by making payments on time (or even early) and being careful to not overuse credit. 

Monitoring and Protecting

Another good habit is to monitor credit a few times each year. The fee to check business credit is well worth the extra precaution. There could be errors or even fraudulent activity on the report that can cause massive problems if not promptly corrected. A major threat to a credit file is a data breach.

Because of this and other credit crimes, companies have taken precautions to protect data stored on their servers. They have also offered free credit monitoring and other measures to assist concerned consumers and businesses. Even so, checking credit often can add an extra layer of security and the ability to take action faster in the event of a problem.

No matter how large or small, every business will need to have access to credit in some way or another. Good business credit scores will make a difference in the type, rates, and terms of loans that will be offered. It will also affect how vendors and suppliers interact with the company. New businesses should start off on the right track by being informed about how credit will work for their company and explore ways to build their credit scores. These steps go a long way to ensure a healthy and viable business now and into the future.

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Sheila Kay

Sheila Kay is an author, ghostwriter and editor residing in the Atlanta, GA area. Among her favorite writing genres are creative nonfiction, self-improvement, and finances. Her first published book, PTSD and the Undefeated Me, is a memoir which has been a stepping stone to her involvement with mental health advocacy for military and civilian men and women. She is currently working on the first fiction novel to be published under her name. For more information or to purchase her books, visit Sheila’s Author Page on Amazon.com.

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