Understand Your Business Credit Profile

Just like individuals, businesses need good credit to achieve their financial goals. Like a personal credit profile, a business credit profile is a record of borrowing activity and related factors that lenders, landlords, insurers, and others use as a key credit worthiness metric. With good credit, these entities are more likely to do business with you on favorable terms. With poor credit or no credit, your options are limited, and costs may be higher.

However, personal credit and business credit don’t function in quite the same way, and ensure you understand the differences and their implications.

How Do Business and Personal Credit Differ?

When comparing business and personal credit, there are a few key similarities and differences:

• Entities. While personal credit scores are attached to an individual’s Social Security number, business credit scores are attached to a business entity’s employer identification number (EIN). Any type of business, including a sole proprietorship, can obtain an EIN from the IRS. It is a nine-digit number, typically shown in this format: 12-3456789.
• Major bureaus. The “big three” business credit reporting bureaus are Experian, Equifax, and Dun & Bradstreet (D&B). The first two names may be more familiar because they’re two of the “big three” personal credit reporting bureaus (the third is TransUnion). D&B focuses exclusively on businesses.
• Score factors. The bureaus produce a variety of business credit scores using different scoring models and scales. In most cases – as with personal credit – the most important factors are your track record of making on-time payments, credit utilization, credit mix, and account ages. However, some business credit scores incorporate external factors like your industry’s overall risk level.
• Reporting requirements. If you get a personal credit card or take out a personal loan, you can be sure that your account activity is being reported to the credit bureaus. It’s not the same with business tradelines – reporting is optional for most commercial vendors and lenders, and you’ll need to ask about their practices.
• Access to information. Many parties may request personal credit scores and reports, but they need your permission. That isn’t the case with business credit. Anyone can pay to access your business’s credit file, including customers, suppliers, investors, and competitors.
• Right to free reports. You’re legally entitled to one free personal credit report per year, and it’s wise to review it for errors or signs of fraud. As a business owner, it’s also essential to monitor your credit regularly. The major business bureaus offer various options for ongoing credit monitoring.

Why Does Business Credit Matter?

Building a strong business credit profile can mean more opportunities at lower costs. Here are some specific ways that good credit can enable your enterprise to thrive:

• Improved access to funding. A solid credit profile indicates to lenders and investors that you’re at a lower risk of delinquency or default, making you more likely to qualify for financing. Better scores mean lower interest rates, higher loan amounts, and more flexible repayment terms.
• More favorable vendor terms. If you buy inventory, supplies, or services on credit, a good credit score can foster trust with your suppliers and potentially lead to more advantageous terms, such as extended payment periods, increased credit limits, and volume discounts.
• Savings on other expenses. Demonstrating creditworthiness isn’t just about credit. A strong score suggests that your enterprise is stable and responsible, so it can earn you lower insurance premiums and reduced security deposit requirements for rental space, utilities, and leased equipment.
• Personal asset protection. Just like separating your personal and business finances can help protect your personal assets from business liabilities, establishing business credit may help protect your personal credit from debts, liens, or judgments that your business incurs.
• Enhanced reputation. Anyone who pays a fee can access your business credit report, and prospective clients and partners may use this information to determine whether to work with you. If your report paints the picture of an enterprise that meets its obligations, that’s great news for everyone.

Who Needs Business Credit?

Businesses of all types, sizes, and stages depend on business credit to finance growth and stay competitive. Good credit can enable easier access to capital, better financing terms, greater operational stability, and enhanced reputation across a diverse range of sectors.

• Startups. It’s common for entrepreneurs to rely on their own credit when launching a business, but startups should start establishing separate credit profiles as soon as possible to maximize credibility and scalability.
• Expanding businesses. Growing companies often need access to ample capital. Good credit can open more doors to workable financing solutions.
• Seasonal businesses. If your firm experiences significant revenue fluctuations over the course of a year, a line of credit can help you avoid cash crunches during slow periods.
• International businesses. Engaging in trade across national borders can come with additional risks and delays, so overseas partners may vet your company through a credit check.

While all types of businesses can benefit from good credit, it can be key for specific industries:

• Manufacturers. Manufacturing firms often require costly equipment and large orders of raw materials. Solid credit can facilitate equipment leasing and working capital loans.
• Retailers. Businesses that need to stock up on inventory before making sales can benefit from borrowing options, including merchant cash advances and trade credit.
• Developers. Most real estate deals involve significant leverage, and a better credit profile can mean lower capital costs – potentially a make-or-break consideration when property prices are high relative to other variables.

To learn more about lending products and resources that can help you grow your business, let us know.