Owning a business is tough enough without worrying about your business credit. You already worry about your personal credit score, but did you know it’s linked to your business credit?
But it’s not the same, mind you.
Need help making sense of all these financial affairs? Want to find assistance building business credit?
Keep reading for more about the difference between business and personal credit and how to build your business credit score.
Owning A Business for the First Time
No matter what sector your business is in, we know you’re running ragged.
Your credit score wasn’t high on the list of things to worry about when you start a business. After all, you are busy figuring out how to do it all on your own. It’s never-ending:
- Having enough capital to stay afloat
- Managing taxes well when the rules change every year
- Having employees or DIYing
- Taking time off
- Paying yourself
- Keeping up with social media
- Learning 800,000 new skills
Avoid all the common mistakes that make most startups to go belly-up. Building your business credit helps you harness the resources at your fingertips and protect yourself and your family. It also goes a long way to establish a more professional reputation.
We know you’re busy, but looking into your business credit history is worth your time investment. Wait until you see the doors it opens.
How Is My Business Credit Score Different from My Personal Credit Score?
The two have connections, for sure, but they aren’t the same thing.
If you haven’t ever applied for any kind of business credit, lenders will take a look at your personal credit history when considering your business for a loan or credit card. They don’t have much of a choice since the business is new and there is no history available.
Most often business owners keep their two credit histories separate because they want to protect their personal assets. All your personal finances are at risk when you use them for business.
Should your startup go under while you’re in the hole, creditors can go after your personal finances to pay your business debts.
It’s also more professional to use a business checking account or business credit card for transactions. Using business finances puts you in a better light with your vendors and customers than if you are using a personal account.
Keeping Personal Credit Separate from Business Credit
Your personal credit profile’s kept at three different financial institutions: TransUnion, Equifax, and Experian. Each one will reflect most of the same information, although you’ll find variances.
If you’ve never had any business credit and you have a new business, it’s important to get your personal finances under control. But you can also take steps to keep the two separate.
Try not to give your social security number in any business setting. Without it, creditors can’t check your personal history, which links to your SSN.
Instead, businesses use their Employer Identification Number or EIN. You’ll need an EIN if you plan to have employees, but even if you won’t hire anyone in the foreseeable future, it’s a good idea to have one to begin building business credit.
You should apply for one of these as soon as possible, and begin using it on applications and paperwork in place of your social.
It’s easy to apply for an EIN, and the results are almost immediate. You can do it online Monday through Friday from 7 am to 10 pm EST, and you’re required to do it in one sitting (the site times out after 15 minutes).
If you have several businesses for which you’re applying for EINs, you’ll only be able to do one per day. For most people, this isn’t a problem, because it’s hard to focus on more than one business at a time.
How to Establish Business Credit
Once you have an EIN, more doors are open to you. Follow these steps to create a business credit history and develop a business credit score.
Apply for A Business Checking Account
This separates your business finances from the personal. If you ever want to apply for a business loan, you’ll need a business bank account to do so.
Deciding which bank to use can be tough. You may feel better about supporting a local bank, but the incentives and bonuses that big name banks offer are much better. You’ll also be able to do more, in particular with international business, if you use a large financial institution.
Before you decide, know all the options so you can make an informed decision. Find an account with a good interest rate and low minimum balance. You should also consider how many free transactions you get every month and opening deposit amount.
You’ll need your newly-acquired EIN, any formation documents you have, your business license, and your ownership agreements when you apply. Don’t forget your ID, too.
Apply for A Business Credit Card
Whether you choose to do this with the same bank you opened your checking account with or with a major credit card company like Discover, you’ll want to have a credit card to give yourself a credit history.
Make sure that you are applying for this with your EIN, not your Social Security number. While it’s true that you don’t need an EIN yet to open a business credit card, you’ll want to keep them separate to protect yourself.
This isn’t a way to finance your next vacation, no matter how much you tell yourself it’s a “business” trip. The purpose of this credit card is to establish a credit history, and you don’t want to have maxed out cards on your record. More on this below.
Apply for A D-U-N-S Number
Dun and Bradstreet is a financial reporting institution. They keep records of businesses’ financial histories and credit information, much like the three agencies that track your personal credit history.
It’s a good idea to apply for a D-U-N-S number to establish your reputation as a business. It stands for Data Universal Numbering System.
You’ll need similar information to what you brought to the bank to apply for your checking account. You might also get asked to submit financial statements. Be as transparent as possible during the process.
If they can’t find the information, they have to estimate. It may lower your score if you don’t give D&B the needed documents.
Their profile of your business includes five key aspects:
- D&B PAYDEX score
- D&B Rating
- Supplier Evaluation Risk
- Financial Stress Score
- Delinquency Predictor
The last three are projections the company makes based on the first two, which compile actual financial data about your company. They estimate your net worth from financial documents you may provide (or industry, size, and other factors if you don’t). They also score your business on how current you are with your vendors, which includes the amounts of each account.
Unlike the three standard credit reporting agencies for personal finances, there is no set standard agency or profile for business credit reporting. Some lending institutions use Dun and Bradstreet, but not all do.
How To Check Your Business Credit
What if you already have some established business credit? If you’ve done the things above, and you want to know what your business credit score looks like, start with the reporting agencies.
Dun & Bradstreet is one, but Experian and Equifax also report on business credit, not only personal.
Check out sites like Scorely, Nav, or Credit.net to check your credit score. Some will give you reports from a couple agencies. Be wary of CreditSignal.
CreditSignal used to be the only way to check your business credit, but now that you have other options, use them. They only give you information that has changed not long ago, instead of the entire Dun & Bradstreet report. To get that information you have to pay for a full membership.
Don’t freak out if you get a low score that shocks you. Business credit isn’t reported on a scale of 350-800 like a personal credit score is. It’s calculated from 0-100. So an 89 is an amazing score, instead of the heart-attack-inducing one you thought it was a minute ago.
How To Increase Your Business Credit Score
Now that you’ve seen your business credit score gauge your reaction. Is it what you expected? Would you like to improve your score or does the one you have give you all the opportunities you need to move forward in your business?
If you’re looking for ways to boost that score a little bit, try some of these methods.
Use Your Credit Card
Your business credit card that you made a point not to use for your vacation? Put it to use. We don’t mean max out the card and carry a balance from month to month.
But it does help to charge some purchases to the account. Then make sure to pay it off immediately. After a few months of consistent, on-time payments, you’ll begin to see your business credit score ticking a few points upward at a time.
There are a few differences between personal credit cards and business credit cards. Unlike with your personal card, rates can change without notice. They don’t have to give you 30 or 45 days to pay before they raise your APR. Business cards are subject to immediate changes without warning.
Credit card companies can change the terms if you make a late payment. The penalties can set you back more than you expected (or can afford), so be very particular about paying your bill on time.
Ask for Terms
Even if you can pay your bills and don’t need to have an account with your vendors, ask for terms. Creating several small accounts with your vendors, even if they are small limits, can help boost your business credit score.
Again, self-discipline is key here. Pay the balances off right away. You don’t want a vendor coming after you because you forgot to pay, especially if your relationship with them is vital for your business.
After a couple of bill cycles, ask the vendors to raise your credit limits. Even small activities like this can boost your business credit score if they are positive.
Get a Small Loan
Over 40% of small businesses got approved for loans from small banks and credit unions in 2016. Borrowing money and paying it back on time is an excellent way to build credit.
You can choose to invest the money in your business. Or use the loan money to pay it back every month. The important thing is the consistent, on-time payments make your credit score go up a little at a time.
If you get a short term loan, you’ll pay less in interest.
And if you get a business loan without penalties for paying it off early, you can pay even less. The application is often shorter than for a large loan, and these types of loans sometimes get approved even if you have a worse credit score than you expected on your credit check.
Building Business Credit Isn’t As Hard As You Think
You’re working harder than you ever have in your life, and a new startup is a massive undertaking. Don’t let your business credit score bring you down.
Building business credit has a lot of steps. From applying for an EIN and establishing a new credit history to making consistent payments on business credit cards and other accounts, you can boost your score step by step.
For more information on small business loans, or to apply now, visit Dealstruck’s website today.