Understanding Your Business Credit Profile
While there are some business owners that don’t realize that in addition to their personal credit score they also have a business credit profile, it’s an important measure of your business’ creditworthiness when you apply for a small business loan, a line of credit, a business credit card, and even trade credit.
Although it’s true that for many small business owners, the need to maintain a good personal credit score will never go away, building a strong business credit profile should be a priority.
What Does Your Business Credit Profile Include?
Similar to how your personal credit score is a reflection of your personal debt obligations, you business credit profile describes how your business interacts with business creditors. That includes any small business loans you may currently have, business credit cards, and even how timely you pay your vendors and utility bills. By looking at your past credit behavior, the credit bureaus try to predict how likely you are to be late in making payments, or even default on a future loan.
Your business credit profile is one of many data points that help a lender determine whether or not to offer you a small business loan or line of credit. The information in your credit profile is collected from a variety of sources, including:
Payment history from your creditors: The right answer will require an honest evaluation of your current situation. Does your business currently have the cash flow to repay a loan? A lender wants to know that your business is not only capable of supporting the debt, but that you’ll make regular and timely payments. A healthy business and a business with a strong credit profile will be in a better position to approach a lender and find success.
Do you know how your credit profile looks today? Lenders and other creditors regularly (and should) report your payment history to the commercial credit bureaus where that information is available for potential creditors to review and evaluate.
Public records: This includes recorded liens, lawsuits, judgments, or delinquent taxes.
Legal records: General information about your business, where you’re located, the industry you’re in, your time in business, and other public records.
Lenders access this information through one of business credit bureaus. Experian, Dunn & Bradstreet, and Equifax are the biggest in the United States (Equifax is the largest business credit bureau in Canada and Veda is the largest bureau in Australia).
How is Your Business Credit Evaluated?
Because your business credit profile is based upon how you manage payments to your creditors, utilities, vendors, and tax obligations, you ultimately control the condition of your business credit profile. The longer you maintain a track record of timely payments, the better your profile will be. Credit profiles can change with every new activity that’s reported, so even if you have a less-than-perfect profile today, over time good credit practices will improve your score.
Your payment history and the public record are big influencers:
How timely do you meet your business financial obligations? The right answer will require an honest evaluation of your current situation. Does your business currently have the cash flow to repay a loan? A lender wants to know that your business is not only capable of supporting the debt, but that you’ll make regular and timely payments. A healthy business and a business with a strong credit profile will be in a better position to approach a lender and find success.
Do you know how your credit profile looks today? The credit bureaus collect detailed information about your utility accounts, business credit cards, banks, vendors, and other creditors. This information will include the age of the accounts, and outstanding balances, any past due status, and a history of payments.
What does the public record say about your business? This information will include the city, state, and county where your business was founded. It will also include your business licenses, property ownership, tax reporting status, and the industry in which you do business. Any negative information like tax liens, lawsuits, judgments, and previous bankruptcy actions can also become part of your profile.
The bureaus use this information to report your past credit history and make predictions of your future behavior and your business’ ability to manage additional debt based upon past behavior. Unlike your personal credit score, there is no universal business credit “score.” The individual bureaus evaluate this information to produce a unique evaluation of your business credit based upon their calculations and criteria.
How Does a Potential Lender Access this Information?
The lenders access this data from the credit reporting bureaus. Each bureau has their own scoring methods, including the information they collect, the algorithms they use to weight the various data points, and how they report that information to the lenders.
Because the bureaus collect large quantities of information from both the public record and the creditors that report (your vendors aren’t required to do so), it’s not uncommon for errors to appear in your profile. The good news is that the bureaus are motivated to maintain accurate information about the businesses within their databases, so they all have dispute policies and will correct any verifiable errors.
You can request a copy of your credit report and report any errors directly to the credit bureau. These business transactions reflect those made with your business name, address, and your company’s federal Tax Identification Number (TIN).
How to Build a Strong Business Credit Profile?
The steps to building a strong business credit profile are pretty straightforward. Here are six tips to get started:
Find out what your profile looks like today: Because your business credit profile doesn’t include a universal credit score, you will likely need to contact more than one of the bureaus. For example, while your Dunn & Bradstreet profile includes much of the same type of information as Experian or Equifax, they might weight the value of some parts of the data differently than the others. As a result, it makes sense to have an understanding of what the different bureaus are reporting about your business.
Look for errors: An error as simple as a misclassification of your industry can negatively impact your ability to borrow if that industry is considered a bigger risk than another. Additionally, if the information about your business is incomplete and you don’t update your profile with current information, the bureaus will be forced to make a “best guess” about the information that is lacking.
Use business credit for business purposes and personal credit for personal expenses: While it’s very tempting (and many business owners do it) to use your personal credit cards or other personal credit for business expenses, it’s not a good idea and doesn’t build your business credit profile. 35 percent of your personal credit score is based upon the amount of your available credit compared to what you currently use. The higher credit balances often required for business expenses can pull down your personal credit score—ultimately handicapping your ability to qualify for business credit with some lenders in the long term. For many young, or early-stage, businesses, using your personal credit sometimes can’t be avoided, but as soon as possible, you should separate the two.
Make sure your vendors report your good credit history: As mentioned above, your vendors aren’t required to report your timely payments, but you want them to. While it’s important to build good relationships with your individual creditors, if they don’t report, it won’t build a history ultimately making it more challenging to create new credit relationships with new creditors. If your current creditors don’t report to the business credit bureaus, encourage them to do so. And, when looking for new vendors, it’s important enough to ask.
Establish business credit accounts: One of the easiest ways for an early-stage business owner to start building a business credit profile is to reach out to current suppliers and ask about establishing a credit account. In those early years it can be difficult to get a small business loan, but those vendor accounts will help you build a strong credit profile early, making it much easier a year or two down the road.
Meet your business credit obligations in a timely manner: The single most powerful tip for building a strong business credit profile is to pay your bills on time. That includes your vendors, any loans you might have, your utilities, and your business taxes. Consistently paying late can take a serious toll on your profile. It doesn’t take long before the occasional late payment starts to negatively impact your ability to qualify for a loan. Conversely, your good credit behavior will over time build a stronger credit profile.
You can’t afford to ignore your business credit profile. Because many small business owners rely on borrowed capital to fuel growth and fund working capital needs, a good profile can be the difference between qualifying for a loan or being rejected.