Why Is Business Credit Building So Important?
Both business and personal credit carry the power to help determine present and future financial goals. By having strong business and personal credit scores you can qualify for lower interest rates and larger lines of credit. This means that during seasonal cash shortages, when receivables are slow to be paid, or when investments are needed for growth – you can reach to a line of credit or loan to help with cash flow.
There is a learning curve when it comes to establishing, building, and maintaining your company credit scores and reports. If access to affordable financing and capital is a part of your business plan, learning how to understand and build business credit scores should be a priority.
The business credit industry is highly unregulated; this means that anyone, including potential partners, lenders, and competitors can purchase a copy of your business credit profile at any time without your knowledge. An established business that has been operating for years may think that they automatically have business credit. This is not always the case. In fact, whether your business is 1 or 20 years old, you can experience the adverse effects from not building up the profiles. The reason for this is that not all vendors/creditors report to the business credit bureaus or may only report to one, this will cause your payment experiences to go unrecognized in the eyes of the business credit agencies.
“A non-existent business credit profile or a business credit profile with little information will increase your likelihood to be denied for business credit cards, equipment leases, much-needed financing and even potential partnerships.”
Proper Business Credit Building Practices Are Often Overlooked
Since not all vendors, lenders, and creditor’s report to the business credit bureaus, companies can develop a strategic plan that will incorporate working with creditors who report and making it a priority. When firms fail to develop a plan for their business credit they can end up causing damage to their reputation and potentially reflect an inactive business. If an interested party pulls your reports and finds an inactive company, you’ll appear to be a higher risk and may get denied or face extremely high interest rates (20 – 40%+ bad credit loans).
In many cases, business owners use their personal credit to run the daily operations of their business. This is very common, but should be used as a vehicle for building business credit rather than the solution for accessing credit. Another benefit to separating from your personal credit/assets is liability and the possible destruction of personal credit scores. There are many loans, lines, leases, and business credit cards that allow newer companies to open the account using their SSN but only report back to the business credit bureaus, we often suggest this as one of starter steps in building business credit.
There are steps a firm can take to begin the process of business credit building:
Incorporate: This is the first and a very important step to separating yourself from your business and starting the process of building credit. A sole proprietor cannot build business credit profiles because the business and the owner are legally the same in regard to taxes and credibility. By incorporating you are legally separating yourself from your business – creating an entity to build credit from.
Employer ID Number (EIN): This is like a Social Security Number for your business, you will need this to pay employees, taxes, apply for loans/accounts, and for credit reporting.
Set up your DUNs: Dun & Bradstreet is the largest business credit reporting agency, you will need to create your DUNs number to have a profile through them. The other 2 major bureaus are Experian & Equifax – they operate differently and you cannot create your ID or profile, once you start ordering from and paying vendors that report, that your profiles will be generated. There are about 6 other business credit bureaus that you may want to check as well, they are less widely used and some are industry specific. Depending on what the lender is looking at, reviewing this reports may be relevant to you.
Open business bank accounts (checking & savings): To qualify for loans or a line of credit, lenders will want to see your financial records/statements. Having a business bank account gives your company an identity in the eyes of financial establishments. Lenders/creditors will want to see separate bank accounts for your business with monthly revenue deposits.
Start establishing lines of credit: Start with a small business account through Staples or a supply store, just make sure that they report to the business bureau(s). Some business owners with good personal credit, will leverage their great credit to get a high limit business credit card or line of credit that reports to the business credit bureaus. When building up vendor accounts and lines of credit for your business, always ask if they report to any of the business credit bureaus. If they do not, you might consider either asking them to or looking for a different vendor to work with.
Pay on time: This might be obvious, but even an invoice paid a few days beyond terms can be damaging to an immature business credit profile. Once you have begun the process of building business credit it is important that you are diligent about paying your bills by or before their due date. This will likely help your business fall into a lower risk index.
Once you have begun the process of building business credit it is important that you are diligent about paying your bills by or before their due date. This will help your business fall into a lower risk index and build stronger scores.
Monitor your reports: This last step is ongoing, due to the unregulated nature of business credit, it is possible for incorrect, negative information or public filings to end up on your report(s) by mistake. We recommend taking on the job of monitoring each profile on a consistent basis. Every major credit profile (Experian, Equifax, & Dun & Bradstreet) should be reviewed to make sure that the information provided is correct, relevant, and up-to-date.
Take This Business Credit Building Case Study for Instance…
Green Inc. is a real estate investment company, for the last decade they have successfully purchased, renovated, and sold properties for a profit. Their growing business depends on an overflow of cash that can only be obtained through relationships with wealthy investors.
Then suddenly investors began pulling out and their business seemed to be on the brink of disaster – with over a decade of success why the sudden change?
After the market crash of 2008 investors became much more risk savvy and began carefully reviewing business credit reports before approving investments. It seems that they had hired a bookkeeper who, unbeknownst to them, was not keeping up with paying suppliers on time.
Green Inc’s scores and indexes had dropped significantly in a matter of months. But, they had no knowledge of it because they were not reviewing reports and did not understand the nature of business credit and the consequences of what it reflects.
Not realizing anyone can review their business credit without their knowledge or approval and make decisions about them based on the info updated they were in a very vulnerable position.
After doing some research the principals found NSA, we knew the time-sensitive nature of this issue and dug right into each report. Our business expert credit specialists were able to remove delinquent information and correct data that had gone undermaintained for a decade.
Now Green Inc. can continue to grow their business without worrying about their business credit adversely affecting investor relationships.
How to Build Business Credit
A program for building business credit should be designed to fix, change, correct, and delete information that is hurting the credit scores and indexes of your company.
Due to the complexity of business credit reporting, scores and indexes can fluctuate for a variety of reasons. Score and index threshold changes can be caused by something as small as a recent late payment from a vendor account or a high dollar collection account caused by damaged goods returned to the supplier with a resolution pending.
The company you work with should have a team of business credit experts who will cater their approach to the repair and building of your company’s credit based on your individual needs and the requirements within your industry.
They should not be in the lending business and be looking to offer you funding at exorbitant pricing as many companies do. The sole focus is on helping you by getting your credit to the best possible position so you have many options to create success and growth for your company.
Here’s Another Case Study of Building Business Credit…
Nate owns a construction company, during the recession his business suffered immensely and he ran into severe financial issues. He was forced to lay off several of his valued staff members and fell behind on accounts with suppliers that he had developed a great relationship with.
The only reason Nate was able to stay afloat was due to his larger, more regular, clients. After the economy picked back up Nate saw an upswing in revenue and decided it was time to rebuild his once flourishing business.
In order to begin landing new larger accounts, he knew that he had to make right with his suppliers.
Nate came to find that his suppliers were no longer willing to offer him payment terms; he had gone so far beyond terms that his delinquencies had turned into judgments against his company. His business credit was butchered leaving him with few options for obtaining good payment terms, let alone landing larger accounts.
After working tirelessly to speak to his suppliers and the bureaus nothing changed – he could not even make contact with any rep at Equifax. Nate feared that if he did not take action his business would backtrack to where it was in 2009.
During his Google searches, he recalled our company and decided the best course of action was to reach out to a business credit specialist. Nate took a leap of faith.
Within 90 days we were able to remove 80% of the accounts impacting each report and we helped him rebuild his once healthy profiles with the right accounts and information. Nate’s business credit was back on track.
Many Industries Require Consistent Profiles, Scores, and Indexes
When businesses apply to become a partner with major retailers such as Wal-Mart, Target and more, they should be prepared to maintain consistent and excellent business credit scores, reports, and indexes. Major retailers will drop their partnership, without warning, with any supplier who falls below their required score threshold.
Even smaller retailers, if they’re smart, will weed out any higher risk suppliers. North Shore has taken the time-consuming burden of establishing, repairing, building, and monitoring credit off the hands of many businesses who rely on successful partnerships and by doing so they have been able to establish and maintain profitable opportunities.