Did you know business credit is the reason for 20% of small business loan denials?
Building business credit is critical to your company's capacity to obtain financing. Whether you operate as a sole proprietorship or a corporation, your firm has the option to establish a distinct credit file from you.
A business is recognised as a separate legal entity with the authority to engage into contracts after it is registered. It is considered as though it were a separate entity from you.
It's crucial to recognise that if you run a single proprietorship, there is no legal or financial separation between you and your company. If this is the case, any credit or funding applications you make will be attributed directly to you as an individual and reported on your personal credit reports.
Building credit for your small business can help you in a variety of ways. It can make obtaining certain types of finance, company insurance, or payment conditions with suppliers easier.
Table of contents
- What Is a Business Credit Card?
- Why is it Important to establish business credit?
- What is the difference between a personal and a business credit card?
- What Does Your Company's Credit Report Say About Itself?
- The Process of Adding Information to Your Business Credit Report
- The Drawbacks of Business Credit Cards
What Is a Business Credit Card?
Business credit cards are available from a variety of lending institutions. The application process is similar to that of applying for a traditional credit card. Small businesses can apply for a card with or without an EIN, making it easier for them to obtain one.
In general, applying for a business credit card is easier than applying for a non-revolving company loan because the process is usually automated and results in an instant credit decision.
Interest rates on business credit cards are often higher than those on ordinary loans. The reason for this is that credit card debt is typically unsecured, posing a greater risk to lenders.
Business owners can apply with an EIN if they already have one, or with their personal Social Security number if they don't. Lenders will use all of the information in the credit application to make their underwriting decisions. Businesses, like individuals, have credit reports and build credit histories, thus any action involving an EIN will appear on the company's credit record.
Why is it Important to establish business credit?
It is possible for your company to have its own credit reports and scores. Anyone can check your company credit, so lenders, suppliers, and even companies may use it to determine whether or not to do business with you.
Good business credit can help you qualify for small business bank loans and funding, as well as get more favourable terms and cheaper interest rates. However, because firms are not required to notify you when your company credit is checked, you may never know how your credit history has impacted your business.
At the same hand, there is a common misperception that if a company has good business credit, the owner's personal credit will never be reviewed and they will no longer be required to offer personal guarantees for a business loan. Personal credit is checked by many small company lenders, and some loans, such as bank loans or SBA loans, demand a personal guarantee.
Business credit and how it affects enterprises is one of the most misunderstood topics that business owners deal with on a regular basis. The most common misunderstanding regarding company credit is that they have a business credit profile in addition to their personal credit score.
What is the difference between a personal and a business credit card?
A business credit card is one that is designed to be used by a company rather than for personal usage. Businesses of all sizes can apply for business credit cards, which can help them create a credit profile and improve future borrowing arrangements.
Business Credit Types
After you've completed the four steps above to place your firm on the map, you can start thinking about which accounts you'd like to create to build your business credit profile. You have options even as a startup.
Installment Accounts
Commercial instalment accounts are business loans in which you borrow a set amount of money over a set period of time. You make a fixed payment to the lender over a set period of time. Have you noticed a pattern? Your interest rate is also set and does not fluctuate month to month.
Revolving Accounts
Lines of credit and small business credit cards are the two major types of revolving credit that you can acquire for your business. You can borrow money up to a credit limit using revolving credit. As long as your account is in good standing, you can charge up to your credit limit once you've paid off your balance.
Your company does not have to pay back the entire amount charged in a given month if you use a credit card. Rather, only the bare minimum is due. Even though it isn't necessary, it's a good idea to pay off your entire account balance each month. You'll be able to avoid paying high interest rates and maintain your credit usage rate low if you do so. Some corporate credit scoring algorithms can reward you for keeping your credit card utilisation low.
Vendor Accounts
Vendor accounts, sometimes known as net-30 accounts, allow your organisation to pay for goods and services after they've been purchased. You have the option to buy now and pay later, usually within 30 days. Certain companies, on the other hand, may provide net-90, net-60, or even net-15 terms.
You can use a vendor account to stretch your cash flow. If the vendor reports to a commercial credit bureau, it may also add a positive tradeline to your business credit report.
Personal Guarantees
To start an account with several types of business credit, you'll need to sign a personal guarantee. You become a co-signer for your business card or small business loan if you sign a personal guarantee. You agree to be held personally liable if your company fails to repay its obligation as promised.
Although having good personal credit can be beneficial and may help you qualify for business finance, you should not sign a personal guarantee unless you fully understand the dangers.
If your firm can't keep up with its payments, you'll be putting your personal cash and credit on the line. Personal guarantees may be required, particularly for bank loans or financing for newer enterprises or those with poor company credit.
What Does Your Company's Credit Report Say About Itself?
Your company's credit profile reflects how well it fulfils its financial responsibilities. This includes how timely you pay your power bills, your business location's lease payments, and any small business debt you may have.
Keep in mind that when a lender evaluates your small business loan application, your business credit profile is simply one piece of the puzzle. The majority of small business owners' personal credit score will be considered as well.
Components of a credit profile for a firm
Payment History: Detailed information on your utility, business credit card, bank, supplier, and other creditors' accounts. The date an account was founded, any current outstanding balances, any past due status, and a comprehensive payment history will all be included in this information.
Information about your company that can be found in local, state, county, and federal records, such as a business licence, property ownership, tax reporting status, and potentially negative information including tax liens, litigation, judgements, and previous bankruptcy actions.
The data gathered by the credit agency and processed into your business credit profile is intended to indicate your company's financial health and ability to service debt. Business credit profiles differ from consumer credit scores in that the information is utilised to create a one-of-a-kind assessment of the company.
Statistics that Demonstrate the Importance of Business Credit for Small Businesses
Statistics can be used in a variety of ways in business, including making decisions, identifying new trends, and generating predictions. According to the Small Business Administration, there are 28.8 million small business owners in the U.S. If you own a small business, you're one of them.
Business credit, like personal credit, evaluates your company's ability to be trusted based on its financial management. Think of your company's credit report as an indicator of its financial health.
According to the NSBA, 27% of businesses questioned said they couldn't get the finance they required. The most common major impact of a lack of finance on those 1-in-4 enterprises was that it prevented them from growing their business.
Personal credit cards are used by 46 percent of all small companies. According to MasterCard study, many small firms struggle to segregate business and personal spending.
According to Creditera, Dun & Bradstreet received 45 million business credit report inquiries in the first half of 2013, while Equifax Commercial received 35 million.
According to Small Company by Demand Media 2015, many lenders consider a business credit score of 75 to be acceptable, making it more difficult for those with a lower score to obtain a small business loan.
According to Cardhub in 2015, it takes the average business 12-18 months to boost its credit score.
According to Bolt Insurance, one-third of small business owners borrow money from family and friends, while 75% of fledgling businesses rely on bank loans and business credit.
According to the 2015 Nav American Dream Gap Survey, 45 percent of small company owners are unaware that they have a business credit score, 72 percent are unsure where to access information on their credit score, and 82 percent are unsure how to interpret their score.
According to Dun & Bradstreet, 90% of Fortune 500TM firms and businesses of all sizes around the world rely on their data, insights, and analytics to optimise operations, manage risk, improve targeting, identify quality leads, strengthen customer relationships, and – most importantly – grow.
According to a study by the Mercator Advisory Group, small company credit cards account for $430 billion in spending, or almost one out of every six dollars spent on general purpose cards.
Having access to business credit is a company's lifeline. It allows you to get the money you need to grow your business, cover day-to-day expenses, buy inventory, hire more personnel, and maintain cash on hand to cover operating costs.
The more time and effort you put into establishing business credit, the better your company's financial prospects will be. Banks, lenders, and suppliers utilise business credit reports to assess a company's creditworthiness. You develop a safety net for your company by establishing good business credit, so you should have no trouble getting the funding you need.
The Process of Adding Information to Your Business Credit Report
To generate credit files for firms, business credit agencies employ information provided by creditors and vendors (also known as data furnishers). A business credit report on your company can be prepared and sold to those who want to study it if you have a business credit file with a commercial credit reporting agency.
When you ask for business funding, a vendor or lender may request access to your company's credit record. There are, however, additional reasons why a corporation would want to check your business credit.
When you apply for a new policy, insurance firms, for example, may look at your company credit. Your insurance premium may be affected by the state of your business credit.
Businesses considering doing business with you may look at your commercial credit to see how healthy your firm is. They could also use the Small Business Financial Exchange to dig up information on your company.
No right to privacy
Your business credit reports are accessible to anyone for any reason. When it comes to business credit reports, there is no such thing as a right to privacy. The commercial credit bureaus have the ability to sell your credit information to anyone.
This is just another reason why establishing and maintaining solid business credit is a critical task to add to your to-do list.
Business FICO Score
It's possible that your company has multiple credit scores. FICO Scores are presumably recognisable to you from personal financing. If you've ever bought a house, financed a car, or applied for a credit card, chances are your lender looked at your personal FICO Score as part of the application process.
FICO is the market leader in personal credit scores. FICO Scores are used by 90% of leading lenders when making consumer credit decisions. FICO Scores, on the other hand, are extremely important in the world of corporate credit scores.
The FICO SBSS Score
The FICO SBSS, or FICO LiquidCredit Small Business Scoring Service, is a common credit score used by lenders and financial institutions to estimate risk when firms seek financing. With a range of 0 to 300, the FICO SBSS Score is a hybrid score that considers both business and personal credit. The higher your credit score, the more likely you are to make timely payments to a business lender.
If you want to have a good FICO SBSS Score, you'll need to work on keeping your credit reports both business and personal in good shape. On-time payment history, low credit card credit utilisation, and a longer credit history are all factors that could increase your FICO SBSS Score.
All credit scores for businesses are important
For some loans, lenders issuing Small Business Administration (SBA) loans will be required to check a FICO SBSS Score. If this occurs, the SBA will require a FICO SBSS Score of 160 or above (typically 165+) or a more thorough credit examination.
FICO SBSS is a widely utilised credit score in the United States, with over 7,500 lenders using it. However, it isn't the only business credit score to keep track of.
Commercial lenders employ a variety of credit scores. As a result, you should monitor your company credit reports as well as other elements that can affect your various business credit scores.
You have no say in which credit score a lender considers when evaluating your application. You can, on the other hand, figure out what elements influence your company credit scores in the first place.
You can work toward establishing company credit reports that perform well under the scrutiny of numerous business credit scoring models by knowing the components that affect your scores, such as payment history and credit use.
Is it important for your business to have good personal credit?
If you own a small business, you must have both personal and business credit. When it comes to small company loans, it's fairly uncommon for lenders to conduct personal credit checks. We'll concentrate on how to develop company credit in this article, but make sure your personal credit scores are in good shape as well.
The good news is that even if your personal credit isn't great, you can start creating business credit.
How to Improve Your Business Credit?
Business credit reports are maintained by credit reporting organisations such as Dun & Bradstreet, Creditsafe, Experian, and Equifax. Doing business with companies that disclose payment history, then paying on time and keeping debt levels moderate, is the key to obtaining strong business credit scores.
However, some technicalities make obtaining company credit a little tough for some entrepreneurs.
How to Build a Business Credit Score?
Build your foundation
It is beneficial to correctly build your firm in order to effectively establish business credit. Take the time to set up your business if it's new so that it appears professional to both clients and lenders.
Get a business phone number and get it listed in directory assistance if possible. If you're just getting started, choose and use a business address, which can be a P.O. Box or even your home address.
Create an account for your company
The majority of enterprises should be registered with their state. This stage should have been completed if you formed a business entity in your state, such as an LLC or S Corp. Annual reports will almost certainly be necessary. (If you started your company in another state, you may also need to register it in the state where you operate.)
You can file a fictitious business name with your state if you are a sole proprietorship or independent contractor who has not yet registered your business. In any scenario, a professional or business licence may be required.
Get a D-U-N-S number
The credit reporting firm Dun & Bradstreet assigns you a DUNS number, which is your company's unique identifier. You should request one if your company does not already have one (you can check whether it does for free). It's completely free.
Creditsafe, Equifax, and Experian each have their own unique identifiers (numbers that identify your company in their databases), but you don't have to contact them to make this request.
Some businesses are required by the IRS to obtain an Employer Identification Number (EIN), although it is not required to establish business credit. However, an EIN may be required for some business financial applications, and EINs may be disclosed to business credit reports.
Get accounts that report to business credit agencies
The information on how you've paid your bills is the most crucial aspect of any credit report. Your business's payment history is used to predict how likely it is to pay on time in the future.
That implies you'll need accounts that report to corporate credit bureaus, which isn't the case with all of them. You should try to set up at least 2-3 accounts with organisations that report to you. As your company grows, more resources will become available.
There is no requirement for a lender or vendor to report to business credit; some do and some don't. Some may only report to one or two of the major commercial credit bureaus, while others may not. If you want to establish company credit, you'll need to choose accounts that report.
Business credit line
You can borrow money in the future when you get a credit line. Your account will have a credit limit when you start a credit line, which is the maximum amount of money you can borrow at one time.
For example, you might be approved for a $5,000 credit line. You can take out one or more loans until you reach $5,000 in total. Borrowing as little as possible will help you save money because you only pay interest or fees on the amount you borrow.
Credit lines are revolving accounts that allow you to borrow money without having to reapply each time. For example, you may borrow $1,000 from your $5,000 credit line and have the money deposited into your account by the lender. The $1,000 will then be repaid, plus interest. Once you've done that, you'll be able to borrow up to $5,000 again.
Alternatively, if the combined loan amounts are less than $5,000, you may be permitted to take out another loan while still repaying the first.
Opening a line of credit could help alleviate financial worries. You'll have some assurance that you'll be able to borrow money if you need to cover a cost or invest in a new venture. However, compare lenders before establishing a credit line; otherwise, you may end up paying more in fees and interest than necessary. Some (but not all) accounts, for example, charge an annual fee that you must pay even if you don't take out a loan.
Business loan
Perhaps you need to place an order for materials or wish to purchase a truck to make deliveries. A company loan could be an excellent alternative if you have a single bill that you can't afford in whole.
You'll get the whole amount you want to borrow right away with a business loan, and you'll pay it back over time, plus interest. Some company loans are unique, such as equipment loans, which can be used to purchase rather than rent a costly piece of equipment.
Lenders may have varying requirements and offers, so searching around for numerous loan offers may help you acquire a good loan. Many small business owners may be required to sign a personal guarantee for a business loan, which means they commit to repay the debt if the company fails to pay.
Credit card for your business
Establishing business credit with a business credit card that reports to the major commercial credit reporting agencies is a terrific way to get started. Benefits such as cash back or travel rewards are available, but you may also use one of these cards to establish credit.
To decide if you qualify for most small company credit cards, the owner's personal credit scores and revenue from all sources will be used. As a result, both startups and established businesses can use them.
If you qualify, you should have at least one open business card, but having more than one can be beneficial. However, exercise caution and avoid becoming overextended, as this might negatively impact your company's credit scores.
You can skip this stage if you don't qualify for a company credit card, but come back to it later when your personal credit history has improved.
A business credit card can be used to pay for ordinary business expenses as well as to borrow money. Some perks that aren't accessible on personal credit cards may be available on business credit cards, such as:
Employee cards allow you to give a credit card to an employee that is linked to your business account. You might be able to restrict how much the employee can spend and where the card can be used.
Separating your personal and company spending using a business card may make it easier to keep correct business records and organise your expenses before filing tax returns. A corporate credit card could aid in the development of your company's credit history.
Your personal credit history may be unaffected by purchases and balances on your company credit card. You may, however, be personally liable for the debt, and unpaid business credit card accounts may appear on your personal credit reports.
Credit cards have higher interest rates than credit lines or loans, and if you can't pay them off straight away, they might be a more expensive option to finance large purchases. They can, however, provide an excellent short-term answer for managing daily spending.
On-time payment
Payment history is the most essential aspect in determining credit scores for any sort of credit, but especially for business credit. Days Beyond Terms (DBT) is a word used in business credit reports to describe how many days past the due date a payment was made. If you have net-30 conditions with a vendor and pay on day 32, the account will be recorded as 2 DBT. Yes, even if you pay a day or two late, your business credit score would be damaged.
Pay on time, even early if possible, and your business credit score will rise faster
Keep an eye on your credit score
Monitoring your business credit history carefully will help you keep track of your development and identify errors. If you discover an error, register a dispute with the credit bureau that made the error.
Check your credit reports and scores with multiple major credit reporting agencies to see whether your accounts are helping your ratings, and if they aren't, consider adding new credit references.
When it comes to establishing company credit, how long does it take?
New accounts may take a few months to reflect on your company credit reports. Once they do, you'll need to make on-time payments for several months to build a solid business credit score. If you follow the procedures above, whether you have a new or old firm, you should be able to obtain a strong business credit rating in a few months to a year.
What is the starting credit score for a business?
The ranges of business credit scores are varied. Both the Experian Intelliscore and the D&B Paydex score go from 0 to 100. Other scores may begin with a different digit. You may have a low credit score or no credit score if your company hasn't created credit.
Learning how to develop and manage your own credit is also an excellent idea. Many small business owners believe their personal credit history is important since lenders may check the business owner's personal credit before authorising a new account.
However, before you decide to borrow money, think about the fees and the impact on your business. If you've been approved for a loan, that doesn't mean you should take it. Keep in mind that you will be responsible for repaying the funds, as well as fees and interest.
If you don't have a clear plan for how the money will help your company or how you'll repay the loan, you might not want to take on debt. You risk devoting the majority of your company's revenue to debt repayment, leaving you with no money for yourself or to invest in the company's future if you don't.
However, if you believe that a loan would help your company make or save more money than the fees and interest will cost, the loan may be a good idea.
Business Credit's Advantages
A good business credit score can benefit you in a variety of ways. When you put in the work to establish your business credit, you may be able to reap the following five rewards for your organisation.
To be considered for funding, you must meet certain criteria. According to a poll, 20% of small business entrepreneurs have been denied business capital in the last five years. Although credit isn't the only aspect that lenders consider, having a solid business credit score can help you be approved the next time you apply for company finance.
Spend less money. When you take out a new lease or service for your company, having good business credit might result in reduced insurance premiums, better rates and fees, and smaller deposits. Suppliers may be more willing to work with you if you have good company credit. When it comes to negative credit ratings, the reverse is true.
Maintain a distinction between your personal and business finances. Separating your credit allows you to preserve your personal credit reports while also simplifying your accounting.
Look for better credit card and loan options for your business. When your business credit is in good standing, you can probably afford to shop around for the best rates and deals available from other lenders.
Boost the value of your business. A high business credit profile might be a significant selling factor if you ever want to sell your company or attract investors.
Expense Control
Business credit cards can help you keep track of and itemise your costs. Business credit cards, in addition to providing the standard advantages associated with credit cards, assist small business owners in keeping work-related and personal expenditures separate. Accounting and tax purposes may benefit from this split. Employees may use the cards to make purchases, and businesses can track their employees' business purchases with ease.
Benefits Unique to You
Company credit cards typically offer a variety of special incentives to encourage business clients. These advantages may differ from those provided to individual clients. Some business credit cards, for example, provide cash back on purchases made at places that are likely to be frequented by businesses, such as office supply retailers.
In anticipation of significant company expenditure, corporate credit cards also tend to provide greater sign-up incentives than personal credit cards. For a limited time, many will also offer a 0% interest rate as an introductory rate.
Because many organisations have large travel expenses, travel bonuses are another typical reward. A business credit card holder may be entitled to utilise an airline's VIP lounge at airports or obtain hotel discounts during business trips.
Furthermore, business credit cards can have more flexible payback terms, which are designed to appeal to enterprises with erratic cash flow.
The Drawbacks of Business Credit Cards
However, there are some severe drawbacks to using a corporate credit card that should be considered:
Personal Guarantees
When a business does not meet the minimum requirements for credit score or other creditworthiness analyses, the lender may request a personal guarantee from the owner or another individual. A personal guarantee is a contract that holds the person applying for the card responsible for the card's regular payments and fees.
Regardless of the creditworthiness of the firm, many business credit card agreements have a personal guarantee provision, so borrowers should read and completely understand all of the terms outlined in the agreement.
If the lender enacts the personal guarantee rules for repayment, any card delinquencies may be reported to the individual's credit record, resulting in a credit score reduction.
If you don't establish business credit, you may be able to borrow money for your company using your personal credit. However, if you can't afford to return the money you borrow using personal credit, your personal savings and valuables may be at stake. Furthermore, utilising your personal credit for your business may make it more difficult to qualify for a personal loan, such as when buying a car or a house.
You can borrow money in three ways: a credit line, a loan, or a credit card, depending on whether you rely on your business's credit, your personal credit, or a combination of both.
To manage your costs and expenses you can use many available online accounting software.
How Deskera Can Assist You?
Whether you are a sales manager or running your own business, there are tons of duties and responsibilities that you have to fulfill. Using the Deskera CRM system, you can manage your contacts, leads and sales deals. You can use the CRM system to manage all customer data and manage your leads, sales negotiations and deals.
Doing so will help you to save the time taken in transferring customer data between the different systems. Having a good CRM system will help you manage your financial and sales reports and be prepared to kick-off your meetings.
Deskera can also assist you with real-time updates about your business like cash flow status, customer satisfaction, inventory management, sales, purchases, purchase orders, customer tickets, customer satisfaction, managing leads, revenues, profit, and loss statements, and balance sheets.
Moreover, it would also help in integrating sales methodology across different platforms onto one system so that you have a consolidated list for email campaigns, leads management, and sales pipeline to mention a few.
It will also help you to sync between your orders, payments, taxes, refunds, product variants, sending out invoices and reminders, facilitating invoice management, and even undertaking follow-ups and advertisement campaigns.
Such a consolidated platform will help you to improve your sales through building effective sales compensation plans and also facilitate faster and well-informed decision-making. It will help you in strengthening your opportunities and being braced for the threats.
Deskera books and Deskera CRM will also be able to ensure the highest customer satisfaction and thereby an increase in net revenues and net profits.
Key Takeaways
- Business credit cards are available from a variety of lending institutions. The application process is similar to that of applying for a traditional credit card. Small businesses can apply for a card with or without an EIN, making it easier for them to obtain one. In general, applying for a business credit card is easier than applying for a non-revolving company loan because the process is usually automated and results in an instant credit decision.
- Good business credit can help you qualify for small business loans and funding, as well as get more favourable terms and cheaper interest rates. However, because firms are not required to notify you when your company credit is checked, you may never know how your credit history has impacted your business.
- Commercial instalment accounts are business loans in which you borrow a set amount of money over a set period of time. You make a fixed payment to the lender over a set period of time. Have you noticed a pattern? Your interest rate is also set and does not fluctuate month to month.
- Although having good personal credit can be beneficial and may help you qualify for business finance, you should not sign a personal guarantee unless you fully understand the dangers.
- Statistics can be used in a variety of ways in business, including making decisions, identifying new trends, and generating predictions. According to the Small Business Administration, there are 28.8 million small business owners in the U.S. If you own a small business, you're one of them.
- The data gathered by the credit agency and processed into your business credit profile is intended to indicate your company's financial health and ability to service debt. Business credit profiles differ from consumer credit scores in that the information is utilised to create a one-of-a-kind assessment of the company.
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