Build your good name with business credit
By Dawn Papandrea
November 24, 2014
In a perfect world, all you'd have to do to borrow money to grow your company is have a strong work ethic, a friendly personality and a viable business.
In reality, however, there is more to creditworthiness than just those skills. Your good name — and your next entrepreneurial endeavor — depends on a strong business credit profile. And key to building that strong profile is understanding the business credit scoring system. What do the credit bureaus look for? How do the scoring models work?
Establishing business credit lets lenders and creditors validate that you can pay your bills on time, says Joel Pruis, senior business consultant with Experian, one of the major credit bureaus for both consumer and business needs. Without established business credit, “it can be difficult for creditors to know if you're truly in business at all,” he says.
Therefore, your goal is to show that you're able to manage credit in the name of the business so you can have access to bigger credit lines as you expand, not to mention better rates and terms. Here are tips to working the business credit system.
Similar to personal credit scores such as consumer scoring model FICO, there are business credit reporting and scoring models that are used by lenders and vendors to predict the likelihood that a business might become 90 or more days delinquent in a 12-month period, says Pruis.
“The better your profile is, the more likely lenders will expand the credit they are giving you.”
–Joel Pruis, Experian
Your business credit file will take time to establish. Jordan Peterson, credit product manager of PNC's Business Banking division, recommends starting off by opening a business checking account. “You can demonstrate good management of that account, not overdrawing it, show cash flow, and that you can sustain balances,” he says. While this will not directly affect your business credit, it shows lenders and vendors that you have a legitimate business with its own checking account.
From there, you can apply for credit cards in the business's name. As you manage these smaller lines appropriately, over time you'll begin to strengthen your business reputation.
Working the system
The tricky part is making sure all of your business credit activities are reported and compiled. That's where business credit bureaus come in, the most prominent of which are Dun & Bradstreet, Experian and Equifax. These agencies collect financial and public record data on businesses, and generate credit reports based on that data. While each bureau's reporting varies slightly, common factors you can expect to see in a business credit report include:
- List of trade references (or lenders/suppliers/vendors that you've done business with)
- Outstanding balances
- Payment history
- Credit utilization
- Public record information
- How long you've been in business
In addition to the data being compiled in report form, there are also business credit scoring models, which calculate a score in the range from 1 to 100 (with 100 being the best). The most notable one is the Dun & Bradstreet PAYDEX score, which is solely based on how promptly a business makes payments to its creditors and suppliers, based on the terms of their agreement. A score of 75 or above is considered excellent, indicating that your company consistently pays on time or ahead of time. Experian and Equifax factor other information into their scoring algorithms, including debt utilization, negative items such as liens and collections, as well as the age and size of the business.
But here's what makes business credit a complex system: Not all data is automatically reported to or collected by the bureaus.
Business owners, therefore, need to be proactive about starting and shaping their own credit files. Here's a quick cheat sheet:
Dun & Bradstreet
To start your Dun & Bradstreet (D&B) credit file, you'll have to request a DUNS number (a free, nine-digit business identifier). This will allow you to create a business profile that includes the name of your organization, its address, the owner's name, the type of company it is (corporation, proprietorship, etc.), the year the business began, the type of business it is, and the number of employees.
Without established business credit, “it can be difficult for creditors to know if you're truly in business at all.”
–Joel Pruis, Experian
As you begin using credit in your business's name, that information will be linked to your D&B file. Since it's not a given that your transaction history will become part of your file, D&B allows you to provide a list of vendors you work with so that you can influence what is included in your file. This “CreditBuilder” service comes with a monthly fee of $89, however, so you'll want to determine if that expense is worth it for you.
Experian and Equifax
Getting your business credit files going with these bureaus requires the following, according to the Experian website:
- Incorporate or form an LLC (Limited Liability Company) to establish your company as a business entity
- Obtain a federal Employer Identification Number
- Open business bank accounts in your legal business name
- Set up a dedicated phone line in your business name and make sure it's listed
Equifax's website also mentions having utility accounts (water, gas, and electricity) under the business name as a building block of credit.
From there, as long as you get in the habit of asking your lenders and suppliers if they report to the bureaus, says Pruis, you can ensure that your positive credit behavior is being documented.
Maximizing your credit
Once you've gotten your business credit files going, it's important to monitor them periodically. How often will depend on the level of borrowing you plan to do, as well as the size of your business. There are no free annual credit reports for businesses, so depending on how deep you want to delve, it could cost from $36.95 for Experian's CreditScore Report to D&B's Comprehensive Insight Plus Report for $151.99 every time you check your credit.
Each bureau has multiple monitoring products, too, depending on your needs. D&B offers the only free product, called CreditSignal, which alerts businesses to changes in their D&B credit score and ratings. For more in-depth monitoring, it can cost anywhere from $19.99 (Equifax's Business Credit Monitor) to $84 (D&B's CreditBuilder) each month.
Should you find any inaccuracies on your reports, you will need to contact the bureaus individually to request changes or dispute errors.
Here are direct links for making business credit corrections:
All in all, having a strong business credit file can have major benefits down the line. “It matters with the amount of credit you can get, the rate you can get on that credit, the terms you can be granted and the ongoing treatment you'd receive from a supplier,” says Pruis. “The better your profile is, the more likely lenders will expand the credit they are giving you.”