How Business Credit Impacts Business Funding
How Business Credit Impacts Business Funding
If you are running a company, it is possible that your business will need to lean on credit one day. Whether you want to open a business credit card or take out business financing, a business credit score is a vital piece of the puzzle.
Want to find out more about business credit and how it can impact your funding needs? Let’s take a closer look.
Credit: A Lifeline for Your Business
Whether you are a new or established business, a good business credit score can be a lifeline for your business. As with personal credit, potential lenders will use your business’ credit score as a measure of its creditworthiness. With better business credit, you can unlock more attractive business financing. And as your business grows, leveraging credit can help your business obtain the funds it needs to succeed. You may want to open a business credit card to cover expenses or take out an installment loan to finance a major cost. In either case, your business will need good credit to make that funding a reality. Since the right funds at the right time can make all the difference for your company, it is easy to see how credit can be a lifeline when your business needs it most. Beyond providing access to funds when you need them, a business credit score can be used when determining insurance premiums, deciding payment terms and credit limits from suppliers, interest rates on any loans you obtain.How Does Business Credit Work?
Although different from your personal credit score, business credit works in a very similar way. You likely know that a good personal credit score can unlock funding for major purchases like a mortgage or auto loan. A personal credit score will be tied to your Social Security Number.
Like a good personal credit score, a good business credit score can open the door to more attractive funding options. But instead of using your Social Security Number, your business will use its unique EIN, or Employer Identification Number. You can apply for an EIN through the IRS for free.
A business credit score is built as vendors, suppliers, and creditors report a business’s payment activity to a business credit bureau. With this information, the credit bureaus can create a business credit score.
The three big credit bureaus that monitor business credit include Dun & Bradstreet, Experian, and Equifax. As with a personal credit score, potential lenders can pull your credit report when determining your eligibility for a loan.
Business Credit Score Ranges
A big difference between business credit scores and personal credit scores is the scale. Personal credit scores fall on a scale between 300 and 850. But business credit scores are only on a scale of 1 to 100. The business credit scale is broken down as follows:- A business is considered a low risk if its score is between 80 and 100.
- A business is considered a medium risk if its score is between 50 and 79.
- A business is considered a high risk if its score is between 1 and 49.
Why You Should Avoid Using Personal Credit for Business Funding Needs
As a business owner, you may be tempted to take advantage of your personal credit to obtain funding for your business. After all, those with a good credit score could likely unlock the funds they need for their business. However, that decision can lead to problems for your personal credit and your business’s funding needs. When you put your personal credit on the line, you can face serious consequences for your personal finances if your business is unable to keep up with its payments. As your business grows, more liabilities may be attached to your personal credit. With that, you may struggle to get approved for funding you need in your personal life. For example, using your business credit could lead to a higher DTI. And with that, lenders may be less willing to provide funds for big purchases such as a home or car. Plus, every time a bank or company hoping to do business with you pulls your credit report, your personal score could suffer. On the flip side, your business could face a loss of funding opportunities if your personal credit score drops. Additionally, sticking to your business credit score for your business funding needs allows for your finances to be neatly separated. In general, it is a smart move to keep your personal credit score separate from your business credit score.Key Stages of Business Credit Development
Ready to build your business credit? Here are the steps you’ll need to take:Check Your Business Credit Score & Report
When looking to improve your business credit score, it is a good idea to understand where you are starting from. With that, you’ll want to check it out with the help of a major credit bureau. Unlike your personal credit report, you are not legally entitled to a free copy each year. But you can purchase a copy of your business credit report from any of the three credit bureaus. You should expect to pay at least $30 to see a copy of your business credit report. Once you see your business credit score, you’ll have a better idea of what needs to be done to improve it. In some cases, you might find that your business credit score is already in the good range. But in others, you’ll find that there is room for improvement. And finally, you might find that your business hasn’t established any credit at all.Establish Business Credit
If you found that your business doesn’t have a credit score at all, then you’ll need to get started by establishing your business credit. A few steps you might need to take to establish your business credit include:- Incorporating your business. If you haven’t already, you’ll need to create a business entity. This will allow you to separate your personal and business credit scores.
- Apply for an EIN, or Employer Identification Number. An EIN acts like a Social Security Number for your business. It only takes a few minutes to apply for this through the IRS.
- Open a separate business bank account. You’ll want to open a business account with your business’s name and EIN to keep the finances separate.
- Register with Dun & Bradstreet. Dun & Bradstreet is one of the most popular business credit bureaus. You can apply for a free nine-digit D-U-N-S number to track your business credit activities. Although this is an optional step, it can be helpful to move your business credit account forward.
Apply for a Business Credit Card
The right business credit card can help you seamlessly manage your business expenses. A business credit card can come in handy to cover expenses. But it can also help your business build a history of responsible credit management. If you decide to open a business credit card, you’ll want to follow the best credit management practices. This includes making on-time payments each month, paying off the balance as quickly as possible, and not overutilizing your line of credit.Work With Vendors
As a business that works with vendors, it is good to make sure that the vendor is reporting your payments to the business credit bureaus. Otherwise, even the most responsible credit management strategies won’t affect your score. If you already pay some vendors on terms, meaning you pay invoices within Net 30 or more days, then consider asking about their reporting habits. In some cases, you may find that the vendor doesn’t report your payments to any credit bureaus. If that is the case, you may want to switch up your vendor to someone that will report your payments.Pay Bills Early
When working with a vendor, you may not have to pay your invoice for a month or longer. But if possible, make an effort to pay any bills from your lender early. Of course, paying on time will result in a good score. But paying your vendor bills early offers the chance of increasing your score even further.
Monitor Your Credit Reports
After making an effort to implement smart credit management strategies in your business, it is time to monitor the results in your credit report. The goal is to manage the growth of your business credit score grow over time. There are no specific rules surrounding how often you should check your credit. Some businesses have needs that require checking their credit score every month, others only need to check in once a quarter, and still, others check in on an annual basis. Take some time to review your business’s needs. If you don’t foresee a big need for credit, then checking less frequently will likely suffice.How to Be a Stand Out for Business Funding
If you want to find the right funding for your business, you’ll likely be competing in a competitive marketplace. After all, many other businesses are out there looking to secure the same funds. Here’s how to make your business stand out when looking for funding.Build a Good Business Credit Score
A good business credit score can make all the difference when applying for funding. Even if you are pitching your idea to investors, they may consider your business credit when making their decision. With that, it is smart to work on improving your business credit. Start the process as possible to make progress before any major funding needs arise.Develop a Strong Business Funding Plan
Everyone has ideas to make their business great. But mapping out your business’s path to greatness in a business plan is a good choice. Potential lenders and investors can look at your business plan to gain a better understanding of your plans. If they like what they see, then you might obtain the funds you are searching for. When writing out a business plan, be specific about how you plan to use the funds. You’ll want to provide a detailed guide to how this influx of funds will propel your business profits upwards.
Additionally, don’t forget to include how you plan to market the product to customers. After all, lenders and investors want to see how you’ll recoup their loan or investment.
Provide References
If you are known in the business community as someone that makes good on their promises, then consider providing references for lenders and investors. Although you’ll need to have people that you can trust to give a good review of your character, it could swing the investor or lender in your favor.Should You Use CPNs for Business Credit?
A CPN, or Credit Privacy Number, seems to promise a fresh start for your business credit. Although it may be tempting to pursue a CPN for your business credit needs, the reality is that CPNs are illegal. Essentially, CPNs are designed to hide bad credit. But if you pursue this option, you could open yourself up to legal consequences. With that, you should absolutely not use a CPN for business credit. Instead, apply for a legitimate EIN from the IRS to use for your business credit needs. If you want to learn more about why using a CPN is a bad idea, check out our detailed post.The Dos & Don'ts of Business Credit Building
As you build your business credit, there are some strategies to implement and others to avoid. First, let’s talk about the things you should do while building your business credit.Do Use Business Credit Cards Responsibly
When used responsibly, a business credit card can help you build credit. Responsible usage involves making on-time payments and keeping your credit usage below 30% of your credit limit. If possible, pay off your business credit card balance in full each month.Do Work With Vendors That Report Your Payments
If you are already working with a vendor and making on-time payments, find out if the vendor is reporting your payments to the business credit bureaus. If not, you might want to move to a vendor that provides this reporting.Don’t Overspend With Your Credit Card
It can be easy to get carried away with putting too many business expenses on your credit card. But it is important to spend within your ability to repay the charge. Don’t max out your cards to avoid a hit to your credit.Don’t Pay With Personal Credit
Instead of mixing your personal and business expenses together, make it a point to keep your business credit separate. When you decide to keep your finances separate from your business's, you’ll keep your personal credit open for the big purchases in your life.Where to Find Solutions for Business Financing, Working Capital & Loans
The U.S. Small Business Administration is a good place to start as you explore your business financing options. You can get matched with lenders based on your credit and funding needs.
Additionally, you can uncover information about potential grants and lending programs for your area.
Before deciding on any funding source, make sure to read the fine print. Keep the interest rate and fees in mind. You don’t want an overly expensive financing solution to hold your business back from meeting its goals.
The good news is that securing business financing will get easier over time with responsible credit management. As you build a business with a strong history of on-time payments, you will see your credit score rise and your available funding options expand. Do you know the #1 Tradeline Secret?
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Author
Sarah Sharkey is a popular financial journalist who has been featured in Bankrate, Money Under 30, GoBankingRates, and FinMasters. Sarah has a reputation for helping people develop smart money skills.
Her passion for strong personal finance balance sheets shines in her blog Adventurous Adulting, along with her love for adventures.
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