Basics of Business Credit

How to Build Business Credit

Step-by-Step Guide to Building Business Credit

Many small businesses rely on either personal or business credit to help finance the purchase of new machinery, acquire inventory, and expand their operations. Even recurring costs like payroll can be covered by short-term loans. Most lenders require assurances that they’ll be repaid on time, and one way they manage repayment risk is by reviewing the business’s credit scores and ratings on file with the major reporting agencies. These indicators can help banks determine whether or not to lend money and at what interest rates.

In addition, many businesses are evaluated on their business credit when they bid on contracts or shop their services to potential business partners. Companies want to make sure they are working with associate businesses that can deliver products on time or complete projects as promised – and have a low risk of going out of business.

How can you build strong business credit scores and ratings? Part of it comes down to your ability to repay debts, but there’s more to the process than making on-time payments. Here are several best practices that can help establish or improve your company’s business credit profile. Beware of fast-and-easy solutions – the whole point of a business credit file is to provide visibility into your company’s financial health over time.

1. Establish Your Business as a Separate Entity

Ideally, business owners think about credit before they start a company. That’s because a business’s structure can affect how lenders or potential business partners judge its credit outlook. Corporations and Limited Liability Corporations (LLCs) exist as independent entities and, generally speaking, are blank slates when it comes to establishing initial business credit scores and ratings. This separation of owner and enterprise is often the best approach when looking to establish your business credit.

On the other hand, a sole proprietorship permanently links your personal credit with the business’s credibility. As a result, lenders and potential business partners can rely on your personal credit score to judge the business. Both past and future oversights on your personal accounts can affect financing or contracting opportunities for the company.

2. Register for a Dun & Bradstreet D-U-N-S® Number

The D-U-N-S Number is a unique identifier for your business, and it’s available for free from Dun & Bradstreet. This will be the number some lenders and potential business partners use to check your business’s credit profile, so you want to have it available before applying for a loan.

3. Open a Bank Account for Your Business

In the interest of establishing your business’s independent identity, you’ll want to use a business bank account for company purposes. A business account can also help you build a track record with the bank. If and when you do apply for credit, you’ll come to them as an existing customer.

4. Make On-time Payments

Lenders want to know that they’ll get a return on their investment, and potential business partners want to know that you’re reliable. Your business should strive to make all payments on time (or early) in order to help avoid the appearance of financial stress on your business credit profile. Failure to pay creditors can lead them to submit negative reports to the business credit agencies. A history of delays or defaults can damage your ability to obtain credit or prove your credibility to another company.

5. Ask Vendors to Supply Trade References to Dun & Bradstreet

Most businesses purchase goods from vendors in order to provide their end product or service. Suppliers often extend trade credit to their business customers, requiring full payment by a specific date.

While many new business owners may think of traditional loans as a primary form of credit, trade credit can actually be one of the most valuable means of business financing. You don’t have to pay upon delivery, and making on-time payments to suppliers can help establish a record of responsible financial behavior.

If your business is meeting its obligations to vendors, you should ask these companies to report your payment history to credit agencies as a Trade Reference.* Payment experiences from Trade References can be weighted in the calculation of many business credit scores and ratings, including Dun & Bradstreet’s PAYDEX®Score.

A new business may not have previous bank loans to refer to when applying for credit, but positive payment experiences can serve much the same purpose and can reflect a good payment history. A record of responsible financial behavior can work in your favor.

6. Monitor Your Business Credit Scores and Ratings

Building your business credit file isn’t a one-and-done operation. New information can negatively or positively affect your scores and ratings.

In order to help avoid unpleasant surprises, business owners should regularly check their company’s scores with a service like Dun & Bradstreet’s Credit Monitor.

Building your small business’s credit scores and ratings isn’t something that can be done overnight. Responsible business owners should work to establish and maintain reputable scores to help put their best foot forward when a lender or potential business partner pulls their business credit report.

*Trade References will be added subject to D&B® verification and acceptance. Trade References are counted as fulfilled when a qualified reference is successfully added to your report. Please see the Trade References glossary page for eligibility, process and other information regarding Trade References.

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