Business Credit

As a business owner it’s very important to understand business credit and conduct business in a way that protects and strengthens your business credit quality.  When you build and grow your company the business credit goal should be to have your company’s credit stand alone and away from your personal credit.  Early on that’s not possible, but over time, with proper business credit skills you can establish solid business credit.

Working in the business credit industry we have learned that most business owners know little about how business credit is established and tracked-and how it affects their personal lives and businesses.

Separating Business Credit from Personal Credit

Every individual in the United States is issued a Social Security Number that is used to track personal credit.  Credit agencies get feedback from creditors and put together a history of credit data on each individual.  The history of credit payback is then ranked and scored to determine your personal credit score.

The same kind of credit history process is also done with businesses. When a business provides another business credit, it's called trade credit. Trade credit is now the largest segment of business lending in the United States.  Just like when you get behind with personal bills and pay late your credit score is damaged the same is true with business credit history.

Information about your company’s trade credit is gathered by business credit bureaus to create your business credit report using your business name, address and federal tax identification number (FIN) that you are issued by the IRS. The business credit bureaus use this trade credit data to generate a report about your company's business credit transactions. In most cases, companies issuing credit to you will rely on your business credit report and trade references to determine if they want to grant your business credit and how much credit they will provide.

The major business credit companies are currently:

  • Dun & Bradstreet
  • Experian Business
  • Equifax Business

Unfortunately, often these credit companies rely on voluntary feedback from companies that provide trade credit and it’s possible you may not have any companies reporting your trade credit to the major business credit firms. In fact, you could have years of solid trade credit without any of it being reported to the business credit bureaus.

How to Establish Business Credit

The big mistake that many business owners make is using their personal information to apply for business credit.  This common practice actually can lower cause your personal credit score to lower.

How does this happen?  Since business owners carry both business and personal credit they would appear to have too many credit inquiries or credit exposure.  Using your personal credit to fun your business typically doubles the number of inquiries made to your personal credit profile and causes your outstanding balances to grow, all of which negatively impact your personal credit score.  It also prevents your business from even establishing any business credit since your personal credit information is being used for the business credit.

A key factor to establishing business credit is to find companies that will establish credit for your business without using your personal credit information and then report the payment history to the major business credit firms.  When they report your company’s payment history to the major business credit companies you start to establish a business credit profile.

The following are the basic steps you need to take to establish your business credit profile and score:

1. Form a corporation or LLC.  Click here to find out more.

2. Register your company with DNB, Experian, or Equifax.

3. Prepare financial statements. These documents are often required by many credit grantors.

5. Find companies willing to grant credit to your business without a personal credit.

When a company grants your business credit, ask that they report the payment history you have with them to the business credit bureau to help build your business credit report.

6. Make all your payments for loans and trade credits on time.

Since you have worked this hard to establish credit, you must keep track of payments so you perform and keep your business credit strong.

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