Building Business Credit

August 14th, 2019

As a business owner you constantly need to take action to move things forward. From dealing with customers, payments & invoices to managing inventory and purchases from suppliers/vendors and getting the best terms from them, you’re working your tail off to make the numbers work.

However, there are always surprises that come up that impact your cash position and knowing how to protect yourself in those situations is critical.

Building a credit profile is the first step and the easiest step as well. When you can prove that you’re paying invoices and loans according to the terms provided to you, lenders and commercial partners will trust you and new doors to capital and financing solutions will open up to you.

Below are the steps to take to build business credit in no time.

Get your business on the radar

Suppliers/vendors and lenders need to validate that your business is legitimate and below are the things you need to ensure this:

  1. Establish a legal business entity — it can be a C-Corporation, or LLC. Check with your legal counsel and accountant to get their advice as to which structure is best for you personally and your business.
  2. Get a Business Tax ID (EIN) — Through the IRS website, you can submit an application and it typically does not take a long time and it’s easy to do.
  3. Open a business bank account. Talk to multiple banks to find the best one. There are also banks that work predominantly with small businesses and can offer solutions specifically tailored for you. Take your time when picking the bank as you’ll be working with them for a long time.

Get a profile or record with the business credit bureaus

Once you’ve established your business, make sure it’s listed with Dun & Bradstreet. D&B is one of the main commercial credit bureaus.

While not many businesses actually like working with D&B, it’s a little bit like a necessary evil. A lot of vendors & suppliers, as well as lenders check a borrower’s D&B report as part of their due diligence process. It’s not the only thing they check, but it is nevertheless part of their list. D&B assigns you a unique identifier, a “DUNS” number, as well as a credit score (the “Paydex” score) that is based on information reported by your creditors.  If you don’t have a DUNS number, you can create one for free.

Another key thing is to make sure that the information on your D&B report is accurate. Lots of times vendors & suppliers report the wrong information, and errors can cause confusion and raise red flags and affect your business credit score in a negative way.

According to a Wall Street Journal survey, 25% of businesses discovered errors in their credit reports, which consequently affected their score in a negative way and made their business look riskier than it actually is.

There are also other credit bureaus out there other than D&B. For example, you can also build credit with Experian, and comparing the two will help you make a case with lenders, suppliers, customers or competition that your business is in good standing.

Use your credit score to your advantage

Many business owners use their personal credit cards to fund their business. This can negatively impact your FICO score. So it’s important to keep your personal credit credit score and your business credit score, separate. Once your business is listed with the commercial bureaus like D&B and Experian, you’ll want to start building and improving the score to get better terms from suppliers and vendors. You can do this in a few ways:

  • Apply for a business credit cardUse this card for business expenses that you can pay off quickly. Business cards usually charge high interest rates, and high balances can negatively impact your business credit scores.
  • Get trade credit from suppliers/vendors. When you buy goods & services from suppliers & vendors, you can set up a corporate account with them and get a line of credit from them.
  • Get trade references from your suppliers & vendors . When applying for a line of credit from other suppliers & vendors or lenders, often times these ask for supplier references.

Make sure that a) your suppliers & vendors actually report your payments to the credit bureaus and b) you check a few weeks later that in fact it has been reported. Just purchasing goods & services from suppliers & vendors or paying down your loans, does not automatically guarantee that those payments show up on your business credit report.

Lastly, when getting a line of credit from your suppliers & vendors, you’ll need to be prudent on how you use them. Pay your bills on time or early is part of that. If you don’t have the means or cash flow to do that, then consider getting a line of credit from a lender that allows you to pay your invoices over a longer period of time (or early!) and get some breathing room. You just need to make sure that you’re then paying the lender on time or according to the terms that you and the lender agreed on.

Get even better terms

Building your business credit brings you leverage. Vendors & suppliers and lenders will be more open to work with you. Once you have leverage, ask for better payment terms. Instead of paying Cash-on-Delivery or on net 30 days, what if you could pay your invoices over 60, 90, or 120 days?

Finally, open up a line of credit for times when your cash flow fluctuates. You’d want to apply for a line when you don’t need so that when things don’t go as planned, you have one in place. Running a business has its ups and downs, and having a good business credit score can create a pad for your business during tough times.

Leave a Reply

Your email address will not be published. Required fields are marked *