By LOUIS DENICOLA
Many entrepreneurs rely on their personal credit to start a business, but when it comes time to scale up, business credit may open doors to greater amounts of capital. Running your business might even be easier and cheaper with a good business credit score.
How does a business credit score differ from a personal score?
Like personal credit scores, business credit - also called commercial or trade credit - rates the chance that a business will repay its debts. Also similar to personal credit scores, a business score is generally calculated by looking at some combination of factors including the business's history of making on-time payments, its credit utilization rate and past collections and/or bankruptcies.
Here are some ways in which personal and business scores differ:
- Unlike with a personal score, industry risk and your business's size might be considered when calculating your business's score. If your business offers a product or service that there's diminishing demand for, a lender could view that as risky even if the current financials look good.
- There's less regulation within the business credit world compared to personal credit. For example, your business credit file can be pulled without your permission - which isn't always the case with personal credit.
- Unlike with your personal credit report, which you can get free through Credit Karma or AnnualCreditReport.com, you typically need to pay for a copy of your business credit report.
Who creates business credit scores?
The major business credit scores are created by Equifax, Experian, Dun and Bradstreet (D&B) and Fair Isaac Corporation (FICO).
Each has a proprietary scoring methodology, and sometimes the bureaus will calculate several scores for different purposes, such as determining the likelihood a business will pay back its loans or a business will remain solvent.
Business credit scores can be less reliable than personal credit scores. According to a 2013 Federal Trade Commission report, 1 in 5 consumers had an error on one of their three major credit reports - however, according to a 2013 Wall Street Journal / Vistage International study, 1 in 4 business owners found errors on their business credit report.
Levi King, CEO of business credit score company Nav, says errors can occur because, for example, sometimes only a business's name and street address are used to identify the company. If there are two businesses with similar names on the same street, they might get confused.
If your business credit report is missing data, check with your lenders and suppliers to make sure they're reporting payments to the credit bureaus - they're not required to do so. Also, if there are errors in the report, reach out directly to the bureaus just like you would with your personal report. They may be able to work with you to correct errors.
How can you establish and build your business's credit score?
There is no specific time frame for how long it takes to build a good business score, but you should get started as soon as possible. It's better to have a record to show than have to scramble at the last minute when you need financing. Regardless of the business's or your personal credit score, some lenders like to see that a business has been running for at least two years.
First, look at obtaining a Federal Employer Identification Number (EIN) for free online at IRS.gov. Then think about opening a business bank account with the EIN and get a dedicated business phone line.
Priyanka Prakash, finance writer for FitSmallBusiness.com, says another good step is to apply for a DUNS number from Dun and Bradstreet. DUNS numbers are recognized worldwide and are required in order to bid on some government and corporate contracts and to apply for a loan secured by the Small Business Association. Your business's DUNS number will be used by D&B to create your business's credit profile and track your business and its relationship with vendors. DUNS numbers are free, though you can pay to expedite the process.
From there, you should consider establishing and using business credit accounts. These accounts can include:
- A business credit card
- Accounts with office supply stores
- A gas card
- Lines of credit from suppliers
Even a $500 vendor credit that needs to be paid within a week could be used to establish a track record of on-time payments. When you are contemplating which suppliers and lenders to partner with, ask them whether they do or can report activity to the business credit bureaus. If you already have suppliers or lenders who refuse to report your activity, you may even consider switching.
At the same time you're building your business credit score, you should consider maintaining a good personal credit history. John Heath, directing attorney of Salt Lake City-based Lexington Law, says that vendors and lenders may also consider a business owner's personal credit. A good personal credit score can be especially important during the first few years when a business is still establishing itself.
What is a good business credit score?
What's considered a good business credit score will depend on who's providing the score, and the ranges are different that you typically see with a personal credit score. For example, Experian Intelliscore generally has a range of zero to 100. D&B PAYDEX ranges from 1 to 100. With D&B, a business with 80 or above is in the best grouping; a good score at Experian starts at 75.
FICO's Small Business Scoring Service (SBSS) ranges from zero to 300. The score can incorporate both business records and the business owners' personal scores. Right now businesses must have an SBSS score of at least 140 to be considered for one of the Small Business Association loan programs.
Equifax provides two business scores. The Small Business Credit Risk Score(TM) ranges from 101 to 992 and indicates a business's ability to repay debt, while the Business Failure Risk Score(TM) generally ranges from 1,000 to 1,880 and indicates the likelihood that the business will file bankruptcy in the next year.
The best credit scores are mostly reserved for businesses that pay ahead of time. In other words, if you have a net 60 agreement with a supplier (which means you have 60 days to pay for goods received), the best PAYDEX and Intelliscore scores are given to businesses that pay 30 days, and if not 30 days at least sooner, than the terms require.
How will having a good business credit score help you?
A strong business score may make getting approved for a business loan or credit card easier, lead to lower interest rates and/or qualify you for bigger loans. Vendors may also look at your business credit score when determining terms, such as the amount of credit they'll extend or the payment period.
Strong business credit might also decrease ongoing expenses, such as business insurance premiums.
One of the biggest advantages of having a good business credit score is you may not need to rely on your personal credit for financing. With strong business credit and good cash flow, you might be able to get a loan or office lease without a personal guarantee.
Your business's credit scores are generally separate from your personal scores, and it's important to establish and build your business credit as soon as possible. A good business score can help you save money and keep your business running smoothly.
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