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What Business Owners need to know about Business Credit

As an entrepreneur, you know the importance of having access to cash and credit to keep your business funded. Even if you have healthy cash flow, having the ability to borrow as needed gives you peace of mind.

When you’re just starting out, you may have to use personal credit and loans to get your business off the ground. But as your business grows, you’ll want to switch to solely relying on business credit.

Keep reading to learn the ins and outs of what business credit is, why it’s important, and how to start building your business’ credit.

What is business credit?

Business credit enables your business to buy something now with the expectation that you’ll pay for it later. Having business credit means that you can borrow money to buy more inventory, purchase new equipment, or fund opening a second location. 

Business credit works just like personal credit. When you establish a good credit rating, lenders see you as a worthy borrower that is at low risk of defaulting. In turn, it’s much easier to borrow money.

There are several main business credit reporting agencies, including:

  • Equifax Business
  • Experian Business
  • Dun & Bradstreet
  • Creditsafe

These credit bureaus collect data about your company and its ability to manage its credit obligations. Information is also submitted to the credit bureaus from creditors and vendors, which create credit files for your business.

Once you have a business credit file with one of the main bureaus, a business credit report is created. This report can be sold to other lenders, insurance companies, and anyone else who wants to review it.

There’s no right to privacy for corporate credit reports. This means that anyone can review the report at any time for any reason. Business credit bureaus can also sell your information to anyone.

What is a good business credit score?

Business credit scores range from 0-100, but each of the different credit bureaus may have its own scoring models.

For example, when checking your business credit score through Experian Business, you want the number to be anywhere from 76-100. This range is a low credit risk score.

On the opposite end, having a score of 1-10 is considered high-risk. If you’re on the lower end of the spectrum, you’ll want to immediately work to improve your score.

Equifax works a little differently. This bureau assigns businesses three different scores that measure:

  • Traditional Credit Risk Score – Overview of your business’ credit history. The number ranges from 100 to 992.
  • Payment Index – Reflects your business’ payment history. The score ranges from 0 to 100.
  • Business Failure Score – This predicts the likelihood of your business failing in the next 12 months. The score ranges from 1,000 to 1,610, with a lower score indicating higher risk.

Because the business credit bureaus score businesses very differently, you’ll want to stay on top of each of your reports to ensure they’re correct.

Why is it important for businesses? 

Not only is it important to have business credit, but it’s also even more important to have good business credit. By showing that your business can manage its debts and make payments on time, you set yourself up for financial security in the future.

Having good business credit makes it easier to qualify for a small business loan. Lenders are less likely to lend to businesses that have a poor credit history as they pose a bigger risk.

On the flip side, having good credit means that you’re likely to credit approved for a loan quickly.

Good business credit also offers many other benefits including:

  • More favorable loan terms (larger credit limits and lower interest rates)
  • Access to cash to grow and expand
  • The ability to separate personal and business finances
  • Better terms from suppliers

Maintaining a good business credit score all but solidifies your business’ financial health. When you can get a loan or line of credit when you need it, there’s one less thing to worry about.

How do you get business credit?

Establishing business credit isn’t as daunting as it may sound, even for new business owners. The good news is that there are some simple steps to take to start building your business credit.

  1. Choose a business structure (ie. LLC, LLP, or corporation)
  2. Obtain a Federal Tax ID Number through the IRS.
  3. Open a business bank account in your business’ name.
  4. Apply for net terms with suppliers and vendors who report to the credit bureaus.
  5. Monitor your credit reports and update any incorrect or outdated information.

In just five steps, you’ll be well on your way to building business credit.

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