Seven Steps to Understanding Business Credit
Obtaining credit is an essential part of maintaining a healthy cash flow, expanding your business and increasing your loan and credit line eligibility. Learning about the process of building business credit â€” which takes time and attention to detail â€” will assist you in staying competitive in your industry.
These seven steps will introduce you to how business credit is defined and established, how time factors into business credit and the role of business credit vendors.
Differentiate Between Business and Personal Credit
Before you begin activities to improve business credit, you need to distinguish between your personal finances and your business enterprise. You can formally accomplish this by establishing your business as a legal entity, such as a corporation or limited liability company. This protects you in terms of liability and financial security.
Enterprise credit scores will be based on a different set of factors and numerical values than personal credit. The three major bureaus for business credit are Experian, Equifax, and Dun & Bradstreet. Business credit scores range from 0 to 100.
Establish a Trade Account
You can increase you credit score by utilizing trade credit accounts for business. A trade account functions as a way for businesses to delay payments to suppliers for a set amount of time (often 30 days) from when goods are received. You may have to consistently pay cash on delivery for a preliminary time period before a supplier will approve you for a trade account.
Establish a Business Account
Opening a business checking and savings account will help in separating your personal and business financial transactions. Use the checking account for initial purchases, like utilities and a business phone line. Once you can afford it, obtain a secured credit card. This requires an initial cash deposit and, although it will not allow to purchase items you do not have capital for, it will contribute to your overall credit history.
Check for Accuracy
As you set up accounts and register for your Employer Identification Number (assigned by the Internal Revenue Service) and Dun & Bradstreet number, double check records to make sure all business information is correct, including how long your business has been in existence and the company title, address, phone number, email, number of employees and description of products and services.
Pay Attention to Dun & Bradstreet
Because Dun & Bradstreet is a major force in building business credit, you want to make sure they have updated information on your business and payment history. These records can be viewed publicly by future investors, vendors and consumers. If your Dun and Bradstreet score is low, then you may have difficulty working with the federal government, major businesses and many municipalities.
Ensure Vendors Report Your Payment Activity
Another distinguishing trait of business credit is that vendors are not required by law to report your payment activity to credit bureaus. However, this positive activity is how your business credit history is established. It is up to your business to contact vendors and request that they report your actions.
Importance of Timely Payments
Timely payments carry more weight with business credit scores than personal credit. As such, payments made on time and in full are crucial to the vitality of your score. Also, making early payments on a regular basis can increase your score.
While this last principle of making timely payments is easy to understand, putting the habit into action can be challenging. Record due dates diligently, and prevent your credit score from decreasing because of careless attention to detail.
If youâ€™re having trouble making payments on time, you may need to consider cashing out part of a retirement account or selling structured settlement payments. It could be worth it in the long run.
Alanna Ritchie is a content writer for Annuity.org, where she writes about personal finance and ways to save money. Alanna has an English degree from Rollins College.