Why You Should Really Care About Your Business Credit

Author: Caron Beesley | March 11, 2015

We all know the importance of establishing a good personal credit score, but if you run a business it’s equally important to build and monitor your business credit.

A good business credit score is essential if you want to secure capital to grow your business. It demonstrates that your business has good character, pays its bills on time, and manages debt – all things a potential lender will look out for.

But building business credit has wider benefits for small business owners, whether you need capital to grow or not.

In a recent webinar, the U.S. Small Business Administration and Dun and Bradstreet Credibility Corp teamed up to explain why business credit matters to business of all shapes and sizes and shared five steps you can take to build your credit profile. Here’s a summary of some of the key takeaways from the event:

Why Good Business Credit Matters
More than just helping you secure a business loan, actively managing your business credit can impact your ability to manage and grow many areas of your business while ensuring positive cash flow. A business with strong credit can help you:

  • Negotiate lease terms – Your creditworthiness can help you secure great rates and terms for that new location your business has been eyeing up
  • Negotiate freight terms – If you ship products and have certain costs tied up in freight, a great business credit report can help you negotiate longer terms, remove the need to pay COD, or make you more competitive as you keep cash on hand for longer.
  • Protect payroll credit – Oftentimes payroll companies will float payroll or extend a line of credit to current customers in order to process payroll for them. Any negative changes in your business credit report can impact payroll processing and some payroll providers may even deny payments.
  • Support national distribution – Say, for example, you do business with a mass merchant who tests your product in a certain area of the country. If product sales take off in that region and they decide they want to sell it in other markets, how will you pay for the inventory to fulfil these orders if your creditworthiness impacts your ability to secure financing?
  • Win more bids – If you submit bids to contractors, you can leverage your strong business credit (such as you great track record of paying your bills on time) to win more work.

Didn’t Think You Have a Business Credit File? Think Again
Many small businesses make the mistake of assuming that just because they are small or haven’t proactively set up a business credit file, that one doesn’t exist in their name.

On the contrary, if you’ve registered your business somewhere or taken out insurance, credit monitoring agencies will pick up on the fact that a company has been started and may assign a credit profile to your business name. In fact, you could never get a call from a credit monitoring agency inquiring about your business, and still have a report open on you in the public domain.

Steps You Can Take to Improve Your Business Credit
Building your business credit takes involves several steps above and beyond paying your bills on time. Here’s what SBA and D&B recommend:

    1. Claim and check your business credit file – You can check whether a credit file exists for your business with D&B. Take some time to review it and verify that all the information is accurate. If you don’t have one, you’ll need to apply for a D-U-N-S® number which can help you start the process of creating a credit file. Read more about the process from business credit expert, Marco Carbajo: Why Your Business Needs to Get a DUNS Number.
    2. Keep your personal and business credit separate – This goes without saying but is often overlooked by new business owners who use personal credit cards to fund their start-up activities. But you need to establish a solid payment history under your business name so avoid buying everything on your personal cards. It will also help you maintain more accurate records of business expenses and keep the IRS happy. You should also place business-related expense accounts such as phone, Internet, etc. in your business name.
    3. Pay your bills on time – This goes without saying, but you should also be aware that larger bills and transactions have more impact on your score than lower bills. So make sure you pay those bills in advance or on-time.
    4. Monitor your credit profile – Good credit is not enough, you’ll need to manage and monitor it too. According to D&B, the credit score of about one in three businesses declines over just a three-month period. Changes in your credit profile can happen at any time and can disrupt your ability to keep operations running smoothly.For example, many companies will monitor the credit reports of clients and vendors to help manage their risk. If a supplier’s evaluation score drops below acceptable levels because of a blip or error on their report, clients may put a hold on new purchases until the score is rectified. So it’s critical that you monitor and take steps to correct any anomalies that show up on your report.Companies like D&B, Experian and Equifax offer tools that let you stay on top of activity, see who’s viewing your profile, get credit performance alerts and more. You’ll also be aware of any change in your ratings before it affects your relationships with customers, suppliers and financial institutions. Finally, keep your credit file current and accurate, reflecting changes such as location, number of employees, outstanding suits/liens and revenue – all of which impact your credit rating
    5. Monitor the credit profiles of customers and vendors – Get into the habit of evaluating the credit risk of vendors and clients. This will help you better manage business risk and your cash flow situation. Are customers starting to pay slowly? Their credit profiles might provide insight as to why.

Clearly, good business credit has a far-reaching impact, it can help you increase sales, improve finance rates and terms, improve cash flow, separate you from the competition, and enhance the credibility of your business across the board. Check out these additional resources from D&B including articles, white papers, and videos for more information about how to manage your small business credit.

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