The important role of credit
Why you need to establish and protect your business credit.
By William J. Lynott
In the specialty fabrics industry, credit used wisely can be a profitable friend; credit used carelessly can be a destructive enemy. When your business has an excellent credit score, you are likely to be offered the most favorable rates if you need to negotiate a lease or a loan; suppliers and vendors will be inclined to extend their most attractive terms; and your business is likely to be well regarded by the business community, making it more attractive to potential customers, buyers or investors. A poor credit score can seriously damage your reputation and hamper your business in a number of ways. Keep these important basics in mind about business credit.
Personal vs. business credit
To build a good business credit score, it’s important to understand the difference between personal credit and business credit.
As soon as we (as individuals) receive a Social Security number and apply for our first job, the three major credit reporting agencies start tracking our lives and building our personal credit profiles. Any firm that issues credit will usually report its experiences with us to the credit reporting agencies. The eventual result is a report that ranks us personally as credit risks.
Business credit works the same way as personal credit in many respects, but there are some important differences. Information about business credit transactions is gathered by the business credit agencies to create a business credit report. Identification includes business name and address, and a federal tax identification number (FIN), also known as an employer identification number (EIN), issued by the IRS. The business credit bureaus use this information to generate a report about a company’s business credit transactions. In many cases, companies that issue business credit will rely on the business credit report to determine whether they will grant an applicant credit and how much they’re willing to give.
If your personal credit reports are mixed with your business reports, keep in mind that any problems with your personal credit may make it difficult, if not impossible, to obtain credit for your business.
An important difference between business and personal credit is that business credit information is sent to the business credit bureaus on a strictly voluntary basis. The credit bureaus may receive little or no information about your credit worthiness, no matter how long you’ve been in business and no matter how well you have handled your business credit in the past. So it’s to your advantage to take steps to establish a positive business credit rating. Once you have established a positive credit score with the business agencies, it will be easier for you to acquire future lines of credit and get favorable terms on leases and loans. Equally important, a favorable credit history will give your business a reputation for financial stability.
Establishing a business credit report
It’s easiest and safest to establish a business credit report if your business is structured as a corporation or LLC, with an FIN or EIN issued by the IRS. If your business is a sole proprietorship or partnership, your business credit information could be mixed in with personal credit data and vice versa, muddying the credit waters. Also, sole proprietors and partners are personally responsible for the debts of the business, putting all personal assets at risk.
Credit scoring models used by the credit bureaus are complex and not revealed to the public. That makes it virtually impossible to know exactly which factors affect credit and to what to degree. The following steps, however, can help you build a positive business credit score.
First, register your business with the business credit bureaus. The leading business credit bureau is Dun & Bradstreet Credibility Corp. (www.dandb.com). Registration with Dun & Bradstreet using your legal business name is free, and will provide you with a D-U-N-S® number—a unique nine-digit sequence recognized as a universal standard for identifying and keeping track of the more than 100 million businesses in the D&B database.
Once you register, you will probably be solicited to purchase a full credit profile, with a current list price of $549. It isn’t really necessary to purchase this profile. Simply registering (at no cost) will enhance the credibility of your business with potential creditors and enable suppliers and lenders to learn about your business.
You should also register with the other two major business credit bureaus:
1. Experian Business: www.experian.com/small-business/business-credit.jsp
Equifax Business: www.equifax.com/small-business/business-credit/en_sb
Once you’ve registered with the major business credit bureaus, you can take steps to build a positive credit report. Almost every business will need to ask for credit at some point. By building your credit score early, you can avoid having to use your personal credit history or a personal guarantee to get the best possible terms when you apply for credit or a loan.
Where credit is due
Here’s how to help put credit to work for—not against—you and your business:
- Ask any company with which you have a favorable credit history to report their experiences to the business credit bureaus to help you build your credit reputation. Remember, there is no requirement for them to do this. Unless you ask, it probably won’t happen.
- Make sure that your business meets all federal, state and industry requirements for conducting business. It’s important to build your business credit under a Tax Identification number, not your personal Social Security number.
- Make sure that your business has a current business plan. While a business plan isn’t always required in credit situations, having one, along with supporting documents, is one of the best ways to demonstrate a solid management approach. This helps to pave the path to a high business credit score.
- Make full use of business credit cards. If you decide to open more than one business credit card, avoid applying for them all at once. It’s best to build up a history with one card before applying for another. Careful use of business credit cards will add to your credit history, make purchases quick and easy, and help to simplify and monitor your bill payment procedures.
- Avoid large credit card balances. Outstanding balances larger than about 25 percent of your credit limit are a red flag to financial institutions.
- Eliminate pre-approved credit card offers from your mailbox. These packages offer a temptation to identity thieves who might try to open new credit accounts in your name or the name of your business. Once they get their hands this piece of mail, they can complete the offer by listing a different address and create an account opened in your name without your knowledge.
There is a way to opt out of these credit offers. Just visit the official Consumer Credit Reporting Industry website at www.optoutprescreen.com, or call 888-567-8688. - Manage your business debt carefully, especially credit card debt. Credit card issuers are unerringly diligent in reporting problems with an account. Any failure to make payments on a timely basis will almost certainly be reported to the credit bureaus, resulting in a negative effect on your credit score.
Despite the inherent risks in the use of credit, there is no practical way to for a business to avoid it. But credit in itself is not harmful. Used skillfully, it can be one of most valuable business tools available.
