If you are starting a small business, you have likely heard about the importance of business credit history. Similar to personal credit, businesses also have credit and a credit score. Rather than being linked to your name and Social Security number, business credit is linked to your business entity and tax ID number. Business credit showcases the performance history of financial responsibilities so companies, financial organizations, or investors can determine whether that company is a good candidate to do business with or lend money to.
Before you can understand what a positive and negative business credit history looks like, you need to know how it is calculated. Three agencies — Dun & Bradstreet, Equifax, and Experian — use different indicators and methods to calculate the score. Most of the formulas consider how much credit your business uses and whether you make your payments on time. The typical score ranking is from 0 to 100. The higher the number, the lower the calculated risk.
Good business credit generally means maintaining a score of 80 or higher. Missed payments, increased debt, or collections can trigger a negative credit history. To maintain a positive credit history, the best things you can do are pay your bills on time and avoid maxing out your lines of credit.
A strong business credit history can help you grow and expand your business. Many banks, lending institutions, and insurance companies rely on business creditworthiness when setting terms, interest rates, insurance premiums, or credit increase requests or when considering a business relationship. Most importantly, building a positive credit history for your business will make it easier and cheaper to get credit when you need it, so it is worth the effort to monitor closely.
Here are three ways you can build credit for your business:
Just like with personal credit, making late payments on your bills will leave a negative mark on your business credit, especially if the creditor chooses to report you.
Every month, make sure to pay the amount you owe toward loans, lines of credit, invoices from suppliers, and other forms of business debt. Paying your bills on time before the due date is even better. Not only will it ensure you are not late, but it will also help improve your business credit ratings.
The amount of money you owe to different banks and creditors will affect your business credit score. Of course, your business might need credit, especially revolving lines of credit for inventory, purchases, or even payroll. But it is wise to try to keep debt levels low. The more responsible you are in using credit, the better your credit rating will be.
Establishing a trade line of credit for supplies or inventory from third-party vendors can be a helpful tool to build credit for your small business, and oftentimes it is the first line of credit your business will have. Before you can get a score, most bureaus require that you have at least four open and active trade lines of credit. This might seem like a lot, but it can be useful for them to determine your financial reputation from multiple sources. You do business with your vendors monthly, so ask them to report to the credit bureaus regularly. The more information the bureaus have, the more accurate your score will be.
Using credit is a good thing if you are wise about the way you are spending. You might be asking, “Does my personal credit score affect my business credit?” Often, the answer is yes.
If your business is new with very little payment history, lenders will conduct a personal credit check. A good credit utilization ratio — around 20% — shows lenders that you are responsible with credit by not maxing out your credit cards. If you find that you are using more than 20% of your credit every month, consider increasing the limit or applying for another card. This will allow you to benefit from having the credit while keeping the ratio low.
You will need to open a few business credit accounts, use them, and pay them back to show you have the ability to repay. Even after you have paid an account in full and do not currently need the account, think hard before you close it. Closing accounts might have an adverse effect on your business credit rating. It will also limit the amount of credit you have at your disposal.
Building or improving your business credit might seem daunting. But with a few smart strategies to use credit responsibly, your business will unlock the benefits of having a positive credit score, which is important in helping it grow. Check out our business lending options to start building your credit.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.
