Business Credit

Whenever your business applies for any type of loan—be it a credit card, a line of credit, a business term loan, a business mortgage, etc.—having a strong business credit profile is critically important. Even though many business owners don’t realize they have both a business profile and a personal profile, the lenders do ,and you can’t afford to ignore them either.

One of the best ways to encourage lenders to look at something other than your personal credit profile is to focus on building a strong business profile.

What a Business Credit Score Says About Your Business

Your business credit profile is designed to reflect the relative risk of your business as a borrower— E.g., how likely it is that you will be late in making payments, or even default on a loan. Your profile plays an important part in getting you a “Yes” or “No” on a loan application — and if you’re approved, your score will influence the interest rate you’re offered. Keep in mind that your business credit profile is just one piece of the overall picture for the lender reviewing your application and some lenders look at a lot of other data in addition to your credit profile to evaluate your business.

Your business credit profile is compiled from a variety of sources, including:

1. Credit obligation information – the credit that your business has obtained from other lenders or businesses
2. Legal filing that may disclose the company’s recorded liens, lawsuits, judgments, or delinquent taxes
3. Other information found in public records; or reported databases

Lending institutions will request your credit profile from one or more of the credit bureaus, and factor that information into how they evaluate your application.

What Influences Your Business Credit Profile

Ultimately, you control your business credit profile. It’s based on how you manage payments to your creditors, utilities, vendors, and tax obligations. The longer you maintain a track record of paying your bills on time, the better your profile will be. Credit profiles are very subjective and can change often as additional information is reported. Here are some of the specific components that go into your business profile:

• Payment history – detailed information about your accounts with utilities, credit cards, banks, suppliers, and other creditors. This information will include the date when an account was started, any current outstanding balances, any past due status, and a detailed history of payments.
• Public records – information about your company found in the city, state, county, and federal records, such as business licenses, property ownership, tax reporting status, and potentially negative information like tax liens, lawsuits, judgments, and previous bankruptcy actions.

This information and more is collected by the credit bureau and processed through various formula-driven analyses to create a profile, which measures the financial condition of your business and its capacity to manage additional debt. Business credit profiles are different than consumer credit scores in that different information is used to produce a unique evaluation of the business’ credit profile.

How Does a Lender Get this Data?

There are several credit reporting agencies that handle this data collection and analysis. The major business credit bureaus include:

• Dun & Bradstreet
• Experian Business
• Equifax Business
• Business Credit USA

You can check their websites for more information about what data is collected and how scores are determined. Each credit reporting agency has its own scoring method, including what information they collect, the algorithms used to weigh various data to create a “score,” and the numerical range they’ve established to report their information. Unlike personal credit scores, which are all based on a set numerical range (500 is low, 800 is high), your business credit scores may use a scale of 1-100 for one bureau, and a different scale with another.

NOTE: The information used by these credit bureaus is not guaranteed to be complete or correct. Your vendors aren’t required to send the trade payment information to them, and it’s easy for errors to be made by similarly named companies or incomplete information. The good news is that the credit bureaus want their data to be accurate and are willing to review and correct any errors on your credit report you identify. You can request a copy of your credit report and report any errors directly to the credit bureau. Business credit reports reflect transactions presumably completed using your business name, address, and your company’s federal Tax Identification Number (TIN). As such, it’s very important to establish and maintain a business identity distinct and separate from your personal identity.

The initial steps to doing this are to:

• Organize and register a legal business entity, such as a corporation, partnership, or LLC and register for a tax identification number with the IRS
• Engage in business transactions, bank accounts, and other business activities in the name of the business entity and report income with a separate income tax return

How Your Business Credit Score Is Used

Most lenders will consult your business credit profile (and for most small businesses, your personal credit score) before deciding whether to extend credit to your business. The lower your score, the “higher-risk” your business will appear in terms of repaying credit. Remember, lenders are looking for loans that will be profitable to them, so a bad profile or a lower personal credit score will likely mean that if you’re approved, you’ll pay a higher interest rate. Your business credit profile may also impact your company’s access to other business relationships, like trade suppliers, insurance coverage, and leasing agreements.

Track and Improve Your Business Credit Profile

Knowing your business credit profile isn’t difficult, but sometimes the steps to ensure it’s accurate and make corrections can be a long process. Start with these steps to find out what’s in your current report.

• Check to see if your business already has a credit report on file – you can get started at Experian’s BusinessCreditFacts.com here.
• If your business doesn’t have a credit report on file, you may need to verify information about your business with one of the major credit reporting agencies in the U.S.
• Start regularly monitoring your report – the major credit reporting agencies provide reports for many companies.
• Note that your actual credit “profile” is a proprietary grade that is shared with lenders and suppliers that might issue trade credit.

Make certain that your report is accurate. These reports may contain errors, such as another company’s identification or business account information, including negative experiences. You can and should do your best to correct them, although this may take time and effort. If errors do exist, be sure to inform any financial institution where you have a loan application pending that there are errors.

What can your business do to improve an existing credit profile?

• Organize as a legally registered company, not just a Schedule C reporting activity.
• Comply with all local requirements for a business license or any other registrations required.
• Register the information above with the business credit agencies to get on their radar earlier.
• Pay all invoices, debt payments, and taxes on time and settle all other business matters as agreed.
• Make sure the vendors you use report your credit history to the bureaus. If they don’t, your good credit with them won’t be reflected on your business credit report.

To Sum Up

A strong business credit profile can make it a lot easier to obtain new credit funding. You can take control and improve your profile by diligent oversight of what’s included in your credit report, as well as responsible management of your business financial arrangements. Taking these actions will be worth it in the long run and will increase your odds of finding a small business loan.