When you own a business, you have a whole new set of credit scores to build, and the sooner you start, the better. Taking the time to build business credit now can mean that you’ll be able to get the loan you need for expansion later. Plus, it will be the most significant factor in determining your interest rate. By understanding how business credit works, you can put your business in a better position financially.
Know the different business credit scores
There are four credit bureaus that assign business credit scores:
- FICO assigns a Small Business Scoring Service (SBSS) score from 0 to 300.
- Dun & Bradstreet assigns a PAYDEX score from 0 to 100.
- Equifax assigns three scores: a payment index from 0 to 100, a credit risk score from 101 to 992 and a business failure score from 1,000 to 1,880.
- Experian assigns a business credit score from 0 to 100.
If you’re in the market for a business loan, the FICO SBSS score is popular with banks for pre-screening, and most require a minimum score of 160. Without any business credit history, the highest possible score is 140, so you can’t rely on great personal credit to obtain a loan. But remember, lenders could choose to pull any of your business credit scores.
4 ways to build business credit
Business credit scores may seem complicated, but building your business’s credit doesn’t have to be. Follow these strategies to help build all of your credit scores.
Set up an LLC or corporation.
Make payments on time.
Keep credit utilization below 30 percent.
Track your credit with each bureau.
Let’s look at each strategy in more detail.1. Set up an LLC or corporation
1. Set up an LLC or corporation
You can only build business credit if your business is separate from you legally, which means it needs to be an LLC or a corporation. While it’s easiest to form an LLC or incorporate your business in your home state, some business owners choose to do so in another state with more favorable business laws.
Why can’t you just use your personal credit for your business? Besides making it far more difficult to obtain a business loan, you’ll also end up with more inquiries on your personal credit, lowering your credit score. If you have any issues with your personal credit, they can negatively impact your business. It’s safer to keep both separate.
2. Make payments on time
Every credit bureau uses your business’s payment history as a factor in determining its credit score. Dun & Bradstreet bases its PAYDEX score entirely on payment history, and for a score of 100, you’ll need to make payments 30 days in advance of the due date.
Paying on the due date will result in a score of 80, which still falls in the bureau’s low risk range.
If you have trouble managing your payments, set them up to be automatically deducted from your account. You can also consolidate your payments and avoid the risk of an overdraft by having all of your bills automatically deducted from your business credit card. Then you only need to pay your credit card bill every month.
3. Keep credit utilization below 30 percent
Equifax, Experian and FICO all use credit utilization as a factor in calculating business credit scores. Credit utilization is the amount of debt your business has compared to the amount of credit it has available, but what credit bureaus weigh most heavily are balances on revolving lines of credit.
Let’s say that you have multiple business credit cards, and their credit limits add up to $50,000. If your total balances amount to $10,000, your credit utilization is at 20 percent.
Since having a higher total credit limit lowers your credit utilization, avoid closing any credit cards. With less credit available, your utilization will increase.
Keep in mind that credit bureaus could check your credit utilization at any time. If a large purchase puts you over 30 percent, pay your credit card down as soon as possible instead of waiting for your due date.
4. Track your credit with each bureau
You’re not entitled to any free business credit reports, but purchasing them through each credit bureau once or twice a year is a worthwhile investment. You’ll be able to check your score and see if there are any errors, which are more common than you might think. In a 2013 study, one in four business owners reported finding errors on their business credit reports.
You may also discover that your business’s credit history is missing information about payments to certain suppliers and lenders. Not every company reports payment information to the credit bureaus. If some of your payments aren’t reflected in your business credit report, contact the company and request that they start reporting them.
While credit bureaus take a wide range of factors into account for business credit scores, the two most important are payment history and credit utilization. Focus on those and in time, you’ll build business credit.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.