Business Credit 101

Sadie Keljikian, Express Trade Capital

One of the most crucial components to effectively fund a business is its credit history. Credit reports help lenders determine how likely a business or individual is to repay their debt. While most individuals are aware of their credit scores, too many don’t know where those numbers come from or what details go into determining them, let alone how business credit is measured. Here are some of the basics of building and maintaining good credit as a business.

• Simple steps to establishing a business’s credit.

As a fledgling business owner, the thought of establishing your business’s credit from square one may seem a bit daunting, but don’t be discouraged. Most of the processes involved in establishing good credit will serve you and your business in more ways than one.

First, you’ll need to either incorporate your business or form an LLC to establish your business as a legal entity. Then, you’ll need to get an employer identification number (EIN) from the federal government and open a bank account on behalf of your business. This is essential to legitimizing your business and ensuring that your personal and professional finances are appropriately differentiated. There are corporate service providers that can help with these steps if you feel ill-equipped or nervous.

Finally, you should register for a DUNS number with credit reporting agency Dun & Bradstreet. A DUNS is a nine-digit number that allows the agency to identify your business’s location and financial activity. Although it isn’t absolutely necessary, a DUNS number will simplify financial reporting on behalf of your business and allow creditors and suppliers to easily run a credit check on your company. These steps will help you establish a transparent, trustworthy business and taking them early will serve you well as your business grows.

• Business and personal credit reports are different.

If you seek funding for your business, your personal credit may not have much bearing unless you are the sole owner and your business is very new. It’s also important to note that while personal credit scores range from 300 to 850, business credit scores usually range from 0 to 100. Lots of uninformed entrepreneurs are shocked and confused to find a much lower number than expected when they check their business’s credit score, so don’t fret.

It’s important to stay on top of your business’s credit and ledger even if you don’t currently need funding, as you never know when you might need a financial boost to seize a growth opportunity. The best way to ensure that your business has optimal credit and financial records is to pay all your bills (including utilities and rent on your workspace) consistently and on time. The better your business’s credit, the more options you will have if you decide to seek out funding. It is also important to note that credit reporting is less consistent for businesses than for individuals. This means that creditors will often ask to see a more thorough history of your business’s finances than you might expect, so even small delinquencies are likely to show up.

• If your business’s credit is compromised, don’t panic!

Although your business’s credit score is important, a temporarily low score isn’t necessarily a death sentence. Low credit scores are usually a symptom of overzealous borrowing and/or underwhelming revenues, but they can be remedied over time. Provided you find a way to pay off your business’s debt, its credit score will gradually recover. If you find that your operational costs make it difficult for you to pay off your debt without accruing more, there are alternate ways to bridge those financial gaps.

If production costs are straining your working capital, consider seeking financing against your open purchase orders or invoices. The primary benefit of these kinds of financing is that they generally rely on your retail customers’ creditworthiness rather than your own. This means that rather than depleting your funds to produce large orders and/or struggling to stay afloat while your customers take their time to pay, you can receive the bulk of those funds upfront. The other benefit is that in many cases, you don’t need to repay your financier. Private lenders that offer financing against receivables will often collect from your customers on your behalf, so you’ll save time as well as money.

In short, carefully managing your business’s credit and general financial activity affords you a lot of options to mitigate the challenges that come with growth. The more consistent your financial records, the better you will be able to handle changes and recover from any difficulty your business may face in the future.

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