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How business credit really works

Whether you are just starting your business or are trying to keep operations running smoothly, having strong business credit is the key to securing a small-business loan.

How lenders use credit reports and scores

Small-business lenders use your business credit report to determine whether you qualify for a loan. Having a strong business credit score can help you secure bigger loans with superior rates and terms. Keep in mind that some lenders will consider your personal credit report in addition to your business’s financials, so that needs to be in good shape as well.

“A lender will often use a personal credit report to look for potential signs of trouble for a business,” says Rod Griffin, director of public education at credit reporting agency Experian. “Difficulty with personal credit often leads to difficulties with the business,” he says.

You may be extended a loan under the condition that you make a personal guarantee on the amount issued, to minimize the lender’s credit risk. As the guarantor, you’ll be personally liable for your business’s debt.

Personal credit reports vs. business credit reports

It’s a good idea to check your business credit report before applying for a loan. Any business’s credit report can be accessed for a small fee through each of the three business credit reporting bureaus: Dun & Bradstreet, Experian and Equifax. The report will include background information on the company such as its tax reporting status; duration of operations; number of employees; property status; derogatory items such as bankruptcies, foreclosures, liens, collections or lawsuits; and insurance and banking information.

Business credit bureaus don’t use one consistent scoring method across the board. Each score is calculated and weighted differently by each reporting bureau.

  • Dun & Bradstreet uses three scores: a Paydex score ranging from 0 to 100, which demonstrates payment history to vendors, with 100 being the best; a credit score ranging from 1 to 5, with 1 being the best score; and a financial stress score, which also ranges from 1 to 5.
  • Equifax combines three scores including a payment index similar to the Paydex score; a credit risk score ranging from 101 to 992; and a business failure score from 1,000 to 1,880. For all three, lower numbers represent better scores.
  • Experian includes one business credit score ranging from 1 to 100 that includes lines of credit and other financials as well as company public records. For Experian, the higher the number, the better the score.

How to establish or improve business credit

Incorporate your business. “Small-business owners often don’t realize they need to file the proper documentation to legally structure and report the business,” Griffin says. While some smaller lenders may be more open to risk, unincorporated business may have a harder time proving their credibility when it comes to repaying loans if the business fails. Forming a limited liability company or corporation not only helps businesses to gain trust from lenders, but it also helps to protect your personal assets in the event that your business incurs debt or is sued. In addition to incorporating, you may want to apply for an Employer Identification Number or federal tax identification number with the IRS. You can also apply for a DUNS number with Dun & Bradstreet. Contact the three business credit bureaus to find out how to establish files.

Establish credit with vendors. “To build commercial credit, work with one or more of your suppliers or vendors to establish trade credit,” says Doug Sperry, vice president and group counsel for Equifax. In this arrangement, a supplier would provide you with goods or services “on credit” under an agreement to pay it back within a certain period of time, such as 30, 60 or 90 days. Make payments on time and ask the vendor to report payments to a business credit bureau.

Begin with small loans from lenders that report to credit bureaus. Smaller loans are easier to obtain, and making payments on time through the business can help establish credit so you can qualify for larger loans. Before you borrow, make sure the lender reports to credit bureaus.

Consider alternative lending. If you have bad credit, bank loans may not be accessible, so consider alternative financing from reputable online lenders who report to credit bureaus as an option until you can build up or repair your business credit.

Make on-time payments from business accounts. Ensure that expenses are in the name of the business and pay bills with a commercial bank account, instead of a personal account.

As you build your business, track your credit reports and report any mistakes that you find. Building up your business credit and keeping your record unblemished will help your company establish a trustworthy reputation with small-business lenders.

Written by Anna Helhoski


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