Understanding Business Credit

One of the most misunderstood things business owners deal with on a regular basis is business credit and how it impacts their businesses. The single biggest misconception about business credit is that in addition to their personal credit score, they have a business credit profile.

I use the term “profile” because business credit is really a compilation of several scores compiled by different bureaus and sometimes reflects information differently. Unlike a personal credit score, there is no single score that helps a potential lender evaluate your business’ creditworthiness.

What Does Your Business Credit Profile Say About Your Business?

Your business credit profile is a reflection of how your business meets its financial obligations. This includes how timely you pay your utility bills, the lease payments on your business location, as well as any small business debt you may have. Keep in mind that your business credit profile is only one piece of the information a lender will consider when reviewing your small business loan application. For most small business owners, their personal credit score will also be part of the criteria.

The information used to build a report on your business credit comes from several sources:

1. Your business credit history—the credit accounts your business has obtained in the past and your payment history with those lenders or other creditors
2. Any legal filings that could include recorded liens, lawsuits, judgments, or delinquent taxes
3. Other information found in the public record like your industry, how long you’ve been in business, etc.

You Can Influence Your Business Credit Profile

In an interview with Levi King, co-founder and CEO of Nav (a free site offering business owners access to their personal credit scores and business credit profiles), he suggested there are a few things you can start doing now to improve your profile—regularly reviewing your current status for starters. When I suggested that felt like an overly simple starting place, he said:

“It might feel that way, but it really isn’t. 45 percent of the businesses we identify in our Dream Gap Report didn’t know they had a business credit score and 82 percent don’t know how to interpret what the credit bureaus are reporting about their businesses.

“It was also interesting to learn that the businesses that regularly monitor their credit were 41 percent more likely to be approved when applying for a small business loan.”

King argues that it’s human nature to make a difference in the places where you’re paying attention. “Basically, attention drives behavior,” he said.

Your business credit behavior is the primary driver of your business profile. If your track record reflects more current accounts than negative accounts with utilities, business credit cards, banks, suppliers, and other creditors, your profile will look better than if there are a lot of late payments or defaults. By focusing on timely payments it won’t take long for your profile to substantially improve.

King suggests, “Getting positive credit behavior on your report will make a big difference. Think in terms of 15 positive accounts for every five negative accounts. Negatives will stay on your report for a period of time, but adding positive credit accounts will move you up because of the ratio of good to bad.”

That being said, you can’t game the system. It will take longer to rebuild a poor profile, but it can be done. However there are some things that will make big improvements (like paying off a tax lien), but it’s really consistently good credit behavior over time that makes the greatest impact.

Some of the specific components that are part of your business credit profile include:

• Payment History: Detailed information about your accounts with utilities, business credit cards, banks, suppliers, and other creditors. This information will include the date when an account was established, any current outstanding balances, any past due status, and a detailed history of payments.
• Public Records: Information about your company that can be found in city, provice, and government records such as business license, property ownership, tax reporting status, and potentially negative information like tax liens, lawsuits, judgments, and previous bankruptcy actions.

The information collected by the credit bureau and processed into your business credit profile is designed to reflect the financial condition of your business and its capacity to service debt. Business credit profiles are different than consumer credit scores in that the information is used to produce a unique evaluation of the business.

How Do Lenders Access this Information?

There are several business credit reporting bureaus, but the three biggest are:

• TransUnion
• Experian
• Equifax

For free, or a nominal fee, you can view your profile to see what lenders see when they evaluate your credit worthiness. Companies like Nav can be another good source of this information.

Each reporting agency has their own scoring method, including how they weight the information they collect, the algorithms they use to score the data, and the way they create the report. Unlike your personal credit score, there is no universal numerical range to express a score. Dun & Bradstreet and Experian both use a 100-point score as part of the profile, but they don’t use a universal method to calculate their scores.

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Five Steps to Build (or Improve) Your Business Credit Profile

1. Know your score: As King suggests, take the time to get familiar with your profile and understand what it says about your business’ creditworthiness. This is the best way to determine where you need to focus your efforts.
2. Separate business and personal credit use: In other words, as soon as possible, avoid using your personal credit for business credit purposes. Using your personal credit for business doesn’t do anything to build your business profile and may even hurt your personal score. Part of your personal credit score is measured by how much credit you have available and how much you regularly use. The higher balances associated with business expenses can have a negative impact on that part of your personal credit score.
3. Establish trade accounts with your suppliers: Vendor credit is relatively easy to obtain and your prompt payments with suppliers are a good way to build a strong profile. 30- or 60-day payment terms might not be a $50,000 or $100,000 small business loan, but will help you qualify for a business loan in the future.
4. Make sure your suppliers report your good credit behavior: If they don’t report to the bureaus, you are building a good credit reputation with that particular vendor, but it’s not doing anything for your profile. This is important enough that you should always ask any potential vendor if they report; and if they don’t, encourage them to do so.
5. Use the credit you need and stay current: The single biggest influencer of your business credit profile is making each and every payment in a timely manner. What’s more, avoiding credit is not a good strategy for building your business credit profile either. The judicious use of credit can be a valuable tool for fueling growth and other initiatives, but lenders look for a track record of responsible credit use and avoiding credit altogether will limit your options should you ever apply for a small business loan in the future.

A strong business credit profile is not a guarantee of financing, but it will provide options that aren’t available to a business with a poor profile. You can take control of your profile by demonstrating the responsible management of the credit you now have; making it possible access borrowed capital when you need it.