While you are busy building your business, it's easy to forget to build another aspect of your company — your business credit.
Just as you have a personal credit history attached to how you spend and borrow money, so does your company.
“The better business credit you have, the more options you have for finding funding for your business,” says Emily Chase Smith, a California attorney and author of “The Financially Savvy Entrepreneur: Navigate the Money Maze of Running a Business.”
With strong business credit, you'll save money, as lenders offer better terms to businesses with high credit scores. Good business credit also increases the likelihood that you can get favorable terms from suppliers.
So how do you build and manage great business credit? We've broken it down into six easy steps.
1. Is your company registered as a corporation?
First, register your company as a corporation with your state government. To do this, you'll need to file documents with the secretary of state office. The requirements and costs of incorporation vary from state to state. For instance, in New York the incorporation fee is $125. In Texas, it costs $300 for a certificate to form an entity. In addition, you'll be required to get business licenses and permits, which also vary by state.
To learn exactly what you need to incorporate your business, check with your state business entity registration office. The Small Business Administration offers further information on setting up a corporation.
Once your company is registered as a corporation, you can check to see if a business credit report is available for it.
If a business credit report doesn't show up for your company, the easiest way to start one is to get a D-U-N-S number (which stands for Data Universal Numbering System), issued by Dun & Bradstreet, suggests Chase Smith.
A business credit report shows the same types of information as a personal credit report, but it is specific to a business's debt repayment and public records, according to Experian. It will include data about your company's payment habits and credit utilization. It may also note filings such as bankruptcies or tax liens. It will also list information about your company's background and industry. Experian offers a sample business credit report.
2. Check your credit report.
As you're building business credit, check your report every few months, suggests Chase Smith.
You can monitor your company's credit file at Experian, Dun & Bradstreet and Equifax. You'll need to pay for a report, though prices can vary, depending on the agency and type of report you request.
Note the business credit score on your report. Dun & Bradstreet lists its PAYDEX score on a range of 1 to 100. A high score, such as 75, indicates there is a low risk your company will fall behind on payments. If your score is low, it can signify to lenders that there is a good chance your company will miss payments.
But don't dwell on the score, advises Rohit Arora, CEO of Biz2Credit.com, an online marketplace for small-business funding. Instead, check the rest of the report for any information that is incorrect. If you find an error on the business credit report, contact the credit bureau. In some cases, you may also want to contact an organization, for instance, if an organization is reporting you make late payments when, in reality, you always pay on time.
See if anything appears that you weren't aware of. You might expect the financial organizations you work with to report to credit bureaus, but check if others are reporting too. Perhaps you have an account at an office supplies store, or your office has a phone system. The vendors you work with in these areas may be reporting your payments, as well.
3. Pay not on time, but early.
Paying early not only establishes good financial habits, it helps establish a routine of on-time payments. This will be reflected as a strong payment history, a critical part of your credit score. But there is another advantage to paying early: Vendors may offer discounts for prepayment, notes Arora.
Furthermore, by getting a reduced rate, you can cut your operating costs and improve cash flow, explains Arora. Having additional cash on hand can make it easier to make other payments, which keeps you in good standing with your accounts.
4. Protect your business.
During the first year she was in business, Gretchen Hahn, owner of the companies Green Grass Marketing & Advertising and KISS Hospitality, had a client who racked up six months of social media management services and then refused to pay.
If your customers don't send in payments to your company, you'll risk not being able to meet your company's own financial obligations. To avoid future financial problems, “Get everything signed,” suggests Hahn. Laying out a contract with clients can help establish requirements for both parties involved, including payment.
Also, check the credit of potential customers and business partners before setting up agreements. Doing so will ensure your business is surrounded by others who can help it build credit — and not bring it down.
5. Adjust for seasons.
A seasonal business can wreak havoc on your cash flow if you don't plan ahead, and that can wreak havoc on your business credit if you aren't paying bills on time. If January, February and March sales are nearly stagnant each year, you might opt to send in payments ahead of time, such as during the high season, when you have a strong influx of cash. You could also set money aside throughout the year for payments in those dry months.
A line of credit can help you manage fluctuations in the buying and selling cycles. That's what has worked for Laura J. Benson, owner of JeanneBeatrice.com, which offers market baskets and other eco-friendly products. “I have significant amounts of money that I have to outlay before I can sell,” she explains. Some of the firm's products need to be ordered in the fall, and arrive in spring. Budgeting carefully allows her to get through both cycles.
6. Keep your credit utilization low.
Credit utilization is one of the factors used to calculate your company's rating. Other information that plays a role in your business credit score include your firm's payment habits, outstanding balances, length of credit history, and public records such as bankruptcies, liens and judgments.
Since credit utilization plays a part in your overall score, stay on top of it. This factor compares how much credit you have available to the amount of credit you are using. Pay attention to the balances you carry on your company's credit cards and other lines of credit.
Business needs for using credit can fluctuate, and your company's credit utilization ratio can go up to as high as 70 percent, but it's not optimal, notes Arora. For a better credit score, work to bring your credit utilization ratio to 0 percent for at least 30 days in a year, he adds.
As a general guideline, to keep your credit utilization manageable, work to keep the ratio under 40 percent. If you have a credit line of $50,000, and you have $5,000 on your cards, then you have a credit utilization ratio of 10 percent, well under the recommended amount.
Building credit takes dedication. By monitoring your company's credit, and taking it into account when making decisions, you'll be able to take steps to strengthen it. Over time, a high score will go hand in hand with a strong performing, profitable company.