The ABCs of Business Credit Learn why it's important to establish a business credit report separate from your personal credit and just how to do it.
As an entrepreneur, did you know you have a unique opportunityto build, maintain and acquire credit both individually andas a business owner? That's good news if you're trying tobuild and grow a company because you won't have to rely solelyon your personal credit to do that.
As a member of the business credit industry, it's been myexperience that fewer then 10 percent of all entrepreneurs knowabout or truly understand how business credit is established andtracked-and how it affects their lives and businesses.
So let's first take a look at how personal credit differsfrom business credit. Then we'll discuss some steps you cantake to build your business credit.
Personal Vs. Business Credit
At the point an individual with a social security number acceptstheir first job or applies for their first credit card, a creditprofile is started with the personal credit reporting agencies.This profile, otherwise known as a credit report, is added to withevery credit inquiry, credit application submitted, change ofaddress and job change. The information is typically reported tothe credit bureaus by those who are issuing credit. Eventually, thecredit report becomes a statement of an individual's ability topay back a debt.
In some cases, the same is true for businesses. When a businessissues another business credit, it's referred to as tradecredit. Trade, or business, credit is the single largest source oflending in the world.
Information about trade credit transactions is gathered by thebusiness credit bureaus to create your business credit report usingyour business name, address and federal tax identification number(FIN), also known as an employer identification number (EIN), whichyou get from the IRS. The business credit bureaus use this compileddata to generate a report about your company's business credittransactions. In many cases, those issuing credit to you will relyon your business credit report to determine if they want to grantyou credit and how much credit they'll give.
The major business credit bureaus that compile and providecopies of the reports are:
- Dun & Bradstreet
- Experian Business
- Equifax Business
- Business Credit USA
Unfortunately, because the information provided to the businesscredit bureaus is sent in voluntarily--no business isrequired to send it in--the credit bureaus may never receiveall or even any information about your business credittransactions. In fact, you could go for years racking up businesscredit without any of it being reported to the credit bureaus.
Establishing Business Credit
Let's start by talking about your business credit score.Business credit scores range on a scale from 0 to 100 with 75 ormore considered an excellent rating. Personal credit scores, on theother hand, range from 300 to 850 with a score of 680 or highconsidered excellent.
It's important to note that there are many factors thataffect a credit score; it's based on more than just whether youpay your bills on time. Your score can be affected by the amount ofavailable credit you have on bank lines of credit and credit cards,the length of time you've had a credit profile, the number ofinquiries made on your credit profile and more. You can find outmore about what factors affect your credit rating by visitingwww.myfico.com.
The mistake many business owners make is using their personalinformation to apply for business credit, leases and loans. Bydoing so, they risk having a lower personal credit score.
Why is that? The average consumer credit report gets just oneinquiry per year and has 11 credit obligations, typically brokendown as 7 credit cards and 4 installment loans. Business owners arenot your average consumer, however, because they carry bothpersonal and business credit. This typically doubles the number ofinquiries made to their personal credit profile and the number ofcredit obligations they carry at any given time, all of whichnegatively impact their personal credit score. And because businessinquiries and personal inquiries aren't separated on theirpersonal credit report, the scores, again, is negatively affected.At the same time, by using their personal credit history to getbusiness credit, they're not able to build their businessscore, which could help them attain critical business credit in thefuture.
The key to establishing a business credit profile and score isto find companies that will establish credit for your businesswithout using your personal credit information and then report thepayment experiences to the business credit bureaus. By reportingthe information to the proper agencies, they'll help youestablish your business credit profile.
The following are the basic steps you need to take to establishyour business credit profile and score:
1. Form a corporation or LLC to operate your business underand obtain an FIN or EIN from the IRS. You can apply for an EINnumber at the IRS website.
I'm suggesting you form a corporation or LLC as opposed tostructuring your business as a sole proprietorship or partnershipbecause with a sole proprietorship or partnership, your personalcredit information could be included on your business creditreport--and vice-versa. In addition, as a sole proprietor orpartner in a partnership, you're personally liable for thedebts of the business and all your personal assets are at risk inthe event of litigation.
Corporations and LLCs, on the other hand, afford business ownersliability protection, and you can build a business credit profilethat's separate from your personal debts. You may be able toapply for credit under your business's name and obtain creditwithout a personal credit check or guarantee if the credit grantorwill do so--and it's been my experience that often all you haveto do is ask.
2. Register your company with the business creditbureaus.
3. Comply with the business credit market requirements.It's extremely important for businesses to meet all therequirements of the credit market in order to ensure a higherlikelihood of credit approval. In fact, not being in compliancewith the credit market can raise red flags with both credit bureausand grantors. The red flags include such simple things as nothaving a business license or a phone line. Most businesses will notgrant credit to another business that hasn't taken the steps toset the company up with the proper licenses and local, state andfederal requirements. You can research the list of business creditmarket requirements at iBank.com.
4. Prepare financial statements and a professional businessplan. These documents are often required by many creditgrantors.
5. Find companies willing to grant credit to your businesswithout a personal credit check or guarantee.
When a company grants your business credit, be certain theyreport the payment experiences you have with them to the businesscredit bureau to help build your business credit report and afinancial foundation for your company.
6. Manage your debt so you don't fall into trouble makingyour payments, which will negatively affect your creditscore.
7. Make monthly payments to credit grantors to keep yourbusiness credit profile active.
At some point, almost every business needs some type of credit.To avoid having to use your personal credit history or guaranteesand to obtain the best possible terms, start the steps necessary tobuild a business credit profile now before you really need it.
David Gass is the president and owner of Business CreditServices Inc., a Las Vegas-based company that provides creditcoaching programs for small-business owners to help them buildtheir business credit. Obtain a free business credit assessment bycalling (866) 254-6076. Or go online to www.corporatecredit.biz to get a copy of their freebooklet Building Business Credit for BusinessOwners.