In the hustle and bustle of today’s fast-paced world of commerce, one of the most crucial financial tools a small business can have at its disposal is credit. In many ways, having good business credit is as important as building a house on a solid foundation. That’s why it pays to know and understand why your small business needs a strong business credit profile and how to build it. Let’s start with the why.
Why is business credit important for your small business?
In many ways, business credit works similarly to personal credit. Having a strong business credit profile informs lenders, suppliers, potential business partners or other stakeholders that your company is financially stable, reliable and well-managed.
Here are some ways strong, established credit can benefit your business over time.
- Easier access to financing
Having a good business credit score strengthens your position when applying for business loans or working capital. Additionally, a good credit standing can also better position your business for more favorable interest rates and payment terms, which could save you money in the long haul. - Reduced rates on insurance
There are several factors that contribute to the cost of your business insurance policy. The one factor that might be a surprise is your business credit score. Simply put, the more stable the business, the less risky it appears to potential insurers. This means small businesses with good credit often qualify for lower premiums. - Better business relationships
Good business credit signals financial stability, leading to better trust and credibility with those you do business with — making them more likely to continue doing business with you. It can also make it easier to buy or lease office space, vehicles equipment, or anything else you might need to grow and succeed.
What is a good business credit score and why is it helpful?
Earning a good business credit score can put your business in a better position to obtain capital, qualify for better rates and terms, and succeed financially. Conversely, a lower score can confine or even restrict those opportunities for future growth. However, there are some slight variations in the way businesses are scored among the different credit bureaus.
1. Experian: Uses two measurements to evaluate a business.
- Business credit score (1 to 100): A higher score represents a lower risk of delinquencies.
- Financial stability risk rating (1 to 5): A lower score represents lower risk for default or bankruptcy within a 12-month period.
2. Equifax: Uses three assessments to evaluate a business.
- Payment index (0 to 100): Reflects payment history with a 90 or higher indicating on-time payments.
- Credit risk score (101 to 992): Assesses probability of becoming delinquent on payments with a higher score indicating a lower risk.
- Business failure score (1,000 to 1,610): Measures likelihood of business closure within a 12-month period with a low score indicating a higher probability of failure.
3. Dun & Bradstreet: Uses several scores to evaluate a business.
- Paydex score: (1 to 100) with 80 or higher being considered low risk, 50 to 79 moderate risk, and 49 or lower high risk.
- Failure score: (1,001 to 1,875) with a lower score indicating higher risk of bankruptcy or closure.
- Delinquency score: (1 to 5) with a lower score signifying a lower risk of late payment or bankruptcy.
4. FICO: Uses one score: FICO SBSS score: (0 to 300) a higher score represents less risk.
Why is it important to separate personal and business credit?
As a business owner, you’re responsible for the protection of both your business’ financial welfare and your own. As such, one of the smartest actions you can take is to separate your personal credit from that of your business.
Here are some notable reasons you should separate your business credit.
- Liability: Using your personal credit to operate your business puts you and all your personal assets at risk if your business ever faces challenges.
- Taxes and accounting: Separating your personal credit from your business credit will make accounting easier when it’s time to file your taxes.
- Obtaining financing: More lenders are judging a business’ creditworthiness solely on its financial standing rather than on an owner’s personal financial standing, since personal credit is not the best indicator of a business’ ability to perform.
How to establish business credit for your small business
Now that you have a basic understanding of why business credit is so important for the strength and future of your small business, the next step is to begin establishing business credit.
Here are a few steps to get you started.
- Incorporate your business
Many small businesses are initially set up as sole proprietorships or general partnerships. In these instances, the business is legally the same as the owner, which means personal credit and business credit will also be shared. By incorporating your business or creating an LLC, you will legally separate personal from business on all accounts so that you can begin establishing credit explicitly for your business. - Register your business (get an EIN)
An EIN (federal tax identification number) is essentially a Social Security number for your business. Not only does an EIN prove your small business’ existence in the eyes of the government, but it is a requisite step toward opening a business bank account and establishing business credit. - Open a business banking account
Opening a business checking account in your business’ legal name will allow you to begin establishing a credit history through financial transactions that will be noted on your business credit report. - Apply for a business credit card
Getting a credit card is a great way to establish business credit. The good news here is you don’t need a pre-established credit profile to apply. Most card issuers use your personal credit score to decide whether to approve you. The better your personal credit score, the more business credit card options will be available to you. - Open a business credit file
Many lenders or businesses may inquire of your business credit score before they do business with you. This will require you to open a business credit file with the major credit reporting bureaus. While Experian, Equifax, and TransUnion do not require you to apply for a business credit file, Dun & Bradstreet does require you to apply for a DUNS number on their website. - Establish trade lines with suppliers
Many vendors and suppliers offer trade lines or trade credit, which grants you a defined number of days to pay for goods after you receive them, also known as a net-15 or net-30 account. These trade lines are a great way to establish good working relationships, as well as build credit for your business.
How to build and maintain business credit for your small business
Now that you have taken the necessary steps to establish your business credit, the next all-important steps to take are the actions, transactions and behaviors that will help build it in the right direction.
Here’s how:
- Pay your bills on time (or early)
Payment history is one of the key factors that is considered when determining a credit score. Whether it’s a business credit card or a trade line with a supplier, your ability to make payments on time, or even before they are due, can have a significant impact on helping you build stronger business credit. - Keep a low credit utilization ratio
While having a business credit card is an excellent way to establish business credit, having a balance that is “maxed” or nearly at its limit can hurt your ability to move your score in the right direction. To help build your business credit, a smart strategy is to keep your credit utilization rate under 30% of your available credit.
Avoid judgements, liens, or bankruptcy filings
It probably goes without saying, but judgements, liens, or bankruptcy filings can have a devastating effect on your business credit score — not to mention your livelihood. Additionally, accumulating debt, missing payments or letting taxes go unpaid can lead to actions that may grant creditors the legal right to seize your assets, all of which could ultimately lead to bankruptcy or closure.
The best course of action is to avoid these marks on your credit while doing all you can to vigilantly monitor and protect your business’ valuable credit at all costs.
Zions Bank is here for you every step of the way
To learn more about building and maintaining your credit and our other business banking solutions, visit Zions Bank online or stop by a local branch and speak with one of our experienced bankers today.
Content above is offered for informational purposes only and does not constitute tax, legal, financial, or business advice. Contact a specialist about your specific needs and circumstances. Content may contain trademarks or trade names owned by parties who are not affiliated with Zions Bancorporation, N.A. Use of such marks does not imply any sponsorship by or affiliation with third parties, and Zions Bancorporation, N.A. does not claim any ownership of or make representations about products, services, or content offered under or associated with such marks.
