Whether you know it or not, your company needs to establish a business credit profile. There will always be a need for it, small businesses and big multinational corporations alike can use it to leverage business relationships, acquisitions and working capital. We will examine the differences between business credit and personal credit. We will talk a long walk down the road of establishing great business credit, what you can do with it after you do establish it and the common mistakes to avoid. But first, let’s ask the question what exactly is business credit?
What is Business Credit?
Business credit is a measure of an organization’s ability to obtain goods or services based on a promise to pay for them later. I’ll take this for $10,000 and pay you back later, deal? This term can refer to the ability of a business to be loaned money; be it an unsecured business loan or a secured business loan. The goods, services, or cash obtained using business credit are usually not personally guaranteed by the owner or representative of the organization. Essentially, business credit allows for borrowing against the assets of the organization, instead of the owner’s personal property.
What is the difference between business credit and personal credit?
The major difference is in the reporting and scoring. When an individual uses their social security number to apply for their first credit card, a credit profile will be create for them. Everyone has heard of a credit report and a credit score. Individual credit relies on a scoring system, FICO, which can place you between 300 – 850 based on your history. The latter score of 850 being flawless credit. The credit score is a numerical expression based on a statistical analysis of that person’s credit files to represent them to a business with no prior history with them. A personal credit score is primarily based on credit report information, typically sourced from credit bureaus like Equifax, Transunion, or Experian.
Business Credit on the other hand does not miraculously start when you start a business. Your score will be on a scale of 0 – 100 (75 and higher is considered excellent). For those of you who have tried to establish a business credit profile, understand that it actually takes some work. It can be classified as trade credit, in the sense that an arrangement between businesses to buy goods or services without making immediate cash payment. The selling business will provide the purchasing business with an agreement to bill them later (accounts receivable), stipulating a fixed number of days or other date by which the customer should pay (accounts payable). If you manage your business credit properly it can be an essential element of capitalization in an operating business. You can reduce your upfront obligations, keep your working capital positive and forecast your over all finances. Information about your businesses payment history will be recorded by the other business. Those businesses do not have to report. That’s where it gets further from personal credit. Information about all your trade history will be collected from business credit bureaus (voluntarily) then compiled into a report and applied to your businesses name, address and EIN (employer identification number, you can get one for your business at the IRS official website). We highly suggest that you be proactive about your credit profile and contact one of the major bureaus for help with establishing a positive business credit profile.
What business credit bureaus are there?
The business credit bureaus compile data to generate a report about your company’s business credit transactions. Most of the time a companies chance of getting a loan will rely almost exclusively on the credit report of the major bureaus. There are a couple business credit bureaus, but the major players include:
How does a company establish business credit?
Make sure you are actually a business, or form one
The first step in establishing business credit, is to make sure you are actually a business. This can be done by forming a corporation or LLC to operate your business under an EIN or FIN. Look to a lawyer and accountant to decide which is best for you. For a short explanation of the differences, head over to Fred Wilsons blog (www.avc.com). This article shows the various corporate entities and why one might be better than the other.
Register Your Company with all the Business Credit Bureaus.
I highly suggest going to www.DnB.com first because they have a bunch of free information and you can call and ask any question you like. They also have a service that will actually establish your profile for you. Give them a call and ask them all the questions you want. You can learn a lot, but be weary of the sale. They will try to make you a customer.
Make sure all licenses and requirements are met
If you run a company that requires certain licenses or certifications, make sure you have them and they are current. You do not want to throw up any red flags to either the bureaus or the company you are trying to obtain credit from. Make sure you have a dedicated company phone line and a city business license as well.
Prepare a Professional Business Plan
Include financial statements in your business plan, make sure it is professional and complete. If you are having a hard time writing one, then hire a professional to assist you. There are also forums and groups out there that can walk you through every step of a business plan. You can even look to the SBA for business plan templates to guide you.
Manage your debt and Make the Payments on Time
Managing your debt sounds like a bad thing, but it’s not. Sometimes it’s healthy to have debt. In fact, you need to have monthly payments going out to your creditors in order to keep your profile actively. Just don’t fall behind or be late on any of them. Make sure your companies financial sheets are sound and your payments are made on time. You will be well on your way to establishing a stellar business credit profile.
Mistakes to Avoid
- Do not over leverage your companies assets, short or long term debt can cripple any company.
- Make sure that you do not back any business credit transaction with a personal guarantee on your own credit. Keep the two separate.
- Request that any company you apply for credit with, is actually going to report to the bureaus. Take advantage of everything you can.