A company’s business credit is its perceived ability to make good on obligations according to the terms of its contracts.
This is often expressed as a collection of scores and ratings found in a business’s credit file. When a company is said to have good business credit, it usually means the organization has a record of responsible financial behavior. Poor business credit is often the result of late payments, defaults, liens, or other financial woes. Business credit bureaus such as Dun & Bradstreet compile payment information and public records into various scores and ratings. Taken together, these comprise the business’s credit file.
Jump ahead to find exactly what you want to know about business credit and how to leverage it:
If you haven’t begun to build your business credit, or if you’re looking for ways to improve your profile after having been denied a contract or loan, there a few things you can do to help yourself out. First, check out this video that explains how certain D&B® scores and ratings are constructed, and what you can do to possibly improve them. Then read through these 7 steps to building your business credit:
Your personal credit and your business credit are (or should be) to entirely different things. Many people don’t understand the difference, or believe they can easily run their business using their personal credit. When first starting out, it may be beneficial to use your personal credit, but you should quickly transition to keeping your business credit separate. For clarification on why business credit and personal credit are different, watch the short clip below.
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. Generally speaking, they have blank slates when it comes to establishing business credit scores and ratings. This separation of owner and enterprise is often the best route to follow when looking to establish your business credit. Get started establishing your business as a separate entity.
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.
Because your business will have its own financial successes and failures, it can be important to keep your business credit separate from your personal credit. Many startups and small businesses will fail in their first year, and you don’t want to have a bankruptcy or other business issue negatively affect your personal credit. The video below helps explain how you can keep your business credit separate.
An Employer Identification Number (EIN) is required to file your company’s taxes. Banks and potential business partners can also request it when you fill out paperwork. You can apply for a free EIN on the IRS website.
It can be important to know the D-U-N-S Number assigned to your business. If you do not have a D-U-N-S Number you can request one, which can take up to 30 business days to process. If you need a D-U-N-S Number quickly, you can get one via an expedited process or you can get a D-U-N-S Number for government purposes.
The D&B D-U-N-S Number is a non-indicative, nine-digit number assigned to each business location in the D&B database and is maintained solely by D&B. The D&B D-U-N-S Number is used by industries and organizations around the world as a global standard for business identification and tracking. You can think of this number as similar to an identification number for your business. Your number connects your business to your business credit profile, and other businesses can use your number to look up your business credit file and help make decisions about your company based on the D&B scores and ratings in your profile. 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 or bidding on certain contracts.
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.
Lenders want to know that they’ll get a return on their investment and potential business partners want to know that you’re reliable. Businesses should strive to make all payments on time (or early) in order to help avoid the appearance of financial stress on their 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.
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, this invoice system 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 in the form of a trade reference**. This record 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 trade references can serve much the same purpose and can reflect a good payment history. A record of responsible financial behavior can work in your favor. Learn more about trade references in this short video:
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 CreditBuilder™ Plus. Those who are looking for a free solution can subscribe to CreditSignal®* and receive alerts when their Dun & Bradstreet credit scores and ratings change.
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.
How Business Credit Can Help With Contracts
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 other businesses that can deliver their product on time or complete a project without the risk of the vendor going out of business.
The information in a business credit report can indicate if a potential partner has historically paid its lenders on time and predicts the timeliness of how it will pay its bills over the next 12 months. In addition, the Dun & Bradstreet business credit report helps predict the likelihood of whether or not a business will go out of business in the foreseeable future, among other things. Because some businesses perform this check before signing on the dotted line, managing your Dun & Bradstreet business credit profile can be especially important if your business is competing for supplier contracts. Your business credit file can be a deciding factor on whether or not to further consider your bid.
Many small businesses rely upon 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.
When banks, suppliers, or customers consider extending credit to a business, most want to gauge the level of risk they’re taking on by providing funds. Potential lenders can look to a borrower’s business credit file for examples of past payment behaviors, including defaults that have been reported to business credit bureaus. You can think of consulting a business credit report as reading the financial biography of a company.
Business credit scores and ratings can influence how easy it is for a business to acquire funding, and can be leveraged for better payment terms from banks and suppliers. Many banks will check both personal and business credit for small businesses, so it’s wise not to let either score falter, especially when your business is still young. A poor business credit standing or excessive debt makes you appear risky to lenders, which can lead to a loan rejection. In a tight lending environment, it pays to clean up your business credit report by making payments to vendors on time and keeping your debt balances low.
Your business credit can also help you manage your cash flow. By checking other companies business credit files you can help anticipate slow or late payments, allowing you to prepare for or prevent cash flow crunches. Your business credit can also help you get higher credit extensions from vendors, which can improve your cash flow.
Arkos, an aftermarket gas compression services company, was formed as a spin-off and inherited less than favorable business credit. After working with a Dun & Bradstreet Concierge Manager to impact their scores and ratings, Akros was able to get more credit extended to them and improve their short-term cash flow.
“Our Concierge Manager, Melissa, has done a fabulous job guiding us through the process of what steps we should take to help get our business credit score to a place that was reflective of who we really are as a young and growing company,” Larry Sumrall, Supply Chain Manager for Akros said. “The ability to obtain better credit terms has also positively impacted our short term cash flow and has made us more attractive to our insurance carriers.”
Business credit is more than just scores and ratings; it’s a way to convey your business’s credibility to others. Your business credibility can help assure others that your company will deliver on its promises. Other business owners want to know that they can trust your business and the claims it makes, and it’s important to show lenders and prospective partners that you’re the real deal. Learn how your business credit can help demonstrate your business credibility.
Every business can benefit from having strong business credit, whether you’re a “mom and pop” shop, a middle market firm or a well-known enterprise, your business credit can help you get funding, contracts, better terms and conditions and overall stronger partnerships. Learn more:
Business credit can be even more important for small businesses than for others. A strong business credit file can help you save money, which can be crucial for small businesses. It can also help you grow. When looking for funding or new contracts, your business credit report can be very valuable. Learn more about why small businesses in particular should build and monitor their credit:
Keeping your personal credit and business credit separate can be crucial. As your business grows, you are likely to assume more personal liability if your personal credit is tied to your business credit. Your personal credit may also suffer when personal credit reports are pulled for your business. In addition, your personal credit may not accurately reflect your business’s financial health. Learn more about why it’s so important to keep your personal credit and your business credit separate:
Unlike with personal credit, another company doesn’t need permission to view a business credit report, which means anyone could be looking at your report. Any time you do business with another company, there is a chance your report may be pulled to evaluate your business. Companies looking to partner with suppliers and banks, in particular, may use business credit reports to help them make key decisions. Learn why you should stay on top of your report, even if you don’t think others are viewing it:
Monitoring and managing your business credit file can be very important because you may not know when another company will use it to make decisions. Past performance is not an excuse to disregard your business credit now. Often, business owners realize they need business credit too late. Some business owners may miss out on potential contracts, loans or customers because they waited too long to pay attention to their business credit file. Learn more about being preemptive and monitoring your business credit file:
The decisions others could be making based on your business credit report may be costing you money. A strong business credit file may help you get better payment terms, insurance premiums and credit limits. Spending the time, and sometimes money, to help impact your report, could save your business money in the long run. Watch the video below to learn more:
Your accountant should be helping you manage and save money, but not all accountants are well versed in building or monitoring business credit file. Dun & Bradstreet has tools that can help you monitor and impact your business credit file. Learn more:
Other Instances Where Your Business Credit Might Affect Your Company
If you’ve ever needed insurance for your company or a surety bond, or wanted better terms and conditions on a contract, your business credit report may have been accessed by the company you were hoping to do business with. Any time a representative from another company is making decisions about whether or not to offer you a contract or change your terms, there’s a chance that he/she might look at your business credit file and use it to help decide how or if to do business with your company.