Business Credit 101
Credit is already a complicated topic. It takes years to learn the ins and outs of personal credit. Then, once you start your small business, you have to learn about a new kind of credit entirely: business credit. Your business’s credit score impacts your ability to gain financing and deal with vendors, so it’s important to have a good understanding of what it means and what affects it. Here’s what you need to know about business credit:
Personal credit versus business credit
Unlike personal credit, which is measured on a scale from 350-850, business credit is generally measured on a scale of 0-100. According to the Small Business Administration, a score of 75 or above is considered good. Anything less than that, and your business may run into trouble. Another consideration for business credit is there is no standardization for the score, so it varies depending on the bureau used to assess it. The three major business credit bureaus are Dunn & Bradstreet, Equifax and Experian. So, how can you get started with business credit, and why does it matter?
A higher credit score gives your business more flexibility.
Why does good business credit matter?
Credit impacts a number of things for small businesses.
- Business relationships: If your business fails to maintain good credit, you could face serious financial issues. You need strong business credit to obtain a merchant account as well as develop relationships with vendors and suppliers. As All Business pointed out, companies often need to pay for goods and services before they receive payment from their own customers. If a vendor deems you uncreditworthy, you may run into cash flow problems.
- Financing: In addition, you may need good credit to secure financing. The SBA found inadequate or delayed funding to be one of the most common reasons businesses fail. A poor credit score could make it difficult to obtain a small business loan through traditional banking channels, although you may be able to receive a business cash advance.
- Additional credit cards: Finally, if you would like to open another business credit card, a good credit score can make the difference between being approved as well as what your credit limit will be.
Establish and maintain business credit
In the beginning, many small business owners put business payments on their personal accounts. This can eventually become complicated. For instance, your personal credit could negatively impact business credit or visa versa. The first step is to separate these. Contact Dun and Bradstreet or one of the other bureaus to determine whether you have a business credit file. If you don’t, you can establish one by applying for a D-U-N-S number, according to an article from D&B and The SBA.
You also may want to consider incorporating your business, BizFilings suggests. Sole proprietorships and partnerships can complicate the relationship between personal and business credit. Form a limited liability company or corporation to legally separate the business from its owners.
“Maintain a high credit score by paying bills on time.”
How do you keep a good business credit score?
You maintain good business credit the same way you maintain a high personal credit score: Pay your bills on time. However, this isn’t the only thing that impacts credit score. Some aspects may be out of your control, for instance, how long you have been in business. Other criteria vary by business credit bureau, according to Nerd Wallet.
It’s important to maintain a good credit score so you have more options when dealing with vendors or seeking financing. While not all of the elements are in your control, keeping a close eye on your finances and paying bills on time will help you keep your business credit score in a good place.