How to Build Your Business Credit Profile
Opening and sustaining a business is a labor of love. It can be demanding, and even exhausting, but many people also find it fulfilling and rewarding. For some entrepreneurs, mastering their craft is only a small part of cultivating a thriving business. When it comes to the financial side of things, there can be a sharp learning curve.
One of the most difficult lessons for many small business owners is the importance of managing cash flow. Successful owners, however, understand that it is a top priority and know how to ensure funds are accessible when needed. A critical part of this is maintaining a strong business credit profile.
What Is a Business Credit Profile?
A business credit profile is a collection of information about a business that helps potential lenders determine whether the business is a worthy borrower. It is similar to a personal credit profile, but can be a bit more complex. A business credit profile looks at things like:
- Bank accounts and banking relationships
- Credit cards utilized and available balance
- Utilities and other operating expenses
- Supplier and vendor relationships
- Additional creditors, if applicable
Explaining How Business Credit Profiles Are Scored
As with a personal credit score, business credit profiles are often marked with a single score. The score ranges from 0 – 100, with 0 meaning “highest risk” and 100 meaning “lowest risk.” Large credit bureaus like Equifax, Experian, and Dun & Bradstreet calculate and report scores based on the following key factors:
- Payment history
- Number of trade experiences
- Outstanding balances
- How much of your credit you use
- Trends over time
- Your industry type
The Key Difference between a Business Credit Profile and Personal Credit
While there are some similarities between business credit profiles and personal credit scores, there are also some inherent differences. Credit bureaus typically use the FICO method to calculate personal scores. However, agencies might score business credit differently, as each has its own unique guidelines, and there is no single system used to generate a score.
Pro-Tip: Because determining business credit can be so inconsistent, most lenders will also look for the business owner's personal credit scores and history. Failure by owners to keep their personal credit in order can spell trouble for their businesses – especially if they are just starting out.
Importance of a Strong Business Credit Profile
To exist, a business must meet its regular expenses, otherwise it cannot stay viable. A strong business credit profile can make all the difference in whether you get the cash you need to operate.
A business can experience many phases which require an infusion of cash over the course of its life cycle. That is why it’s so important to have access to credit.
A business credit profile not only helps secure operating funds, but it can also play a role in determining a lender's interest rates and terms. It can be the deciding factor in whether a business is eligible to receive specific types of commercial loans, each of which have their own uses and benefits.
10 Rules for a Strong Business Credit Profile
Because businesses’ needs change over time, the need for supplementary funding is unlikely to disappear completely. We will begin by discussing five rules for building a strong profile. And since maintaining that profile over time is so important, we will also look at five rules for keeping a business credit profile desirable long-term.
#1 Incorporate Your Business
Incorporating your business, even by forming a limited liability corporation (LLC), serves to separate your personal identity from the business.
#2 Get an EIN or TIN
Once you’ve incorporated your business, it’s important to apply for a federal employer identification number (EIN) or tax ID number (TIN). This allows the government to recognize your company for tax purposes and will be important as you establish your business credit profile.
#3 Open a Business Bank Account
To distinguish it as a legal entity, open a business checking account using your business’ legal name. Be sure to consider things like monthly fees, opening deposit minimums, and minimum balance requirements.
Pro-Tip: We advise opening your business checking account with a financial institution that can also help with lending and other services you may need as your business grows.
#4 Register with Dun & Bradstreet
Dun & Bradstreet is one of the largest credit bureaus for business credit reporting. Any business that is required to register with the federal government can also register with Dun & Bradstreet to receive a unique D-U-N-S number. This is a nine digit code that can be used to identify the business.
#5 Create and List a Phone Line in Your Business’ Name
One thing potential lenders will look for is payment history. Even in a relatively new business that has had little opportunity to build its credit profile, there will almost always be some operating expenses. Utilities, such as phone lines or electric bills, can show that your business pays on time.
Maintaining Your Business Credit Profile
Once you’ve established your business credit profile, it’s important to keep it strong over time. Doing so is fairly simple, though it’s much easier to damage a strong profile than it is to build and maintain one. Be patient, stay consistent, and follow these tips to fortify your business credit profile for the long haul.
#6 Take Out a Revolving Loan
When it comes to revolving loans for your business, first consider your needs. If your business is looking for some simple spending power, a business credit card may be all that you need. However, if your business regularly incurs large operating expenses, a business line of credit may be more helpful.
Remember, these types of loans are not lump sums of money to be paid back in installments over time, but rather available lines of credit to be used when you need them. Regardless of which type of loan you choose, your business credit profile will benefit when you open a revolving loan, use it responsibly, and manage your outstanding balance.
Pro-Tip: The business credit card from First Service can be a great option for businesses who already have existing business credit card debt. The card boasts a competitive rate with a generous limit, but more importantly, it comes with no balance transfer fees. This means you can roll over the balance from another card with a higher interest rate, and you won’t be penalized up front.16
#7 Open Trade Accounts with Your Vendors
When you work directly with a vendor or supplier, you should have them create an account in your business’ name. As you watch your business credit profile over time, periodically check to see if they are reporting your payment behaviors to business credit bureaus.
#8 Stop Using Your Personal Credit
Many business owners have a hard time separating their personal finances from their business – especially in the early stages. Remember, the goal is for your business to establish its own reputation as a responsible borrower, so you should use accounts in its name.
#9 Pay Your Bills on Time
It may sound obvious, but paying your bills in a timely manner is one of the most important things you can do to maintain your business’ credit profile over time. One of the easiest ways to do this is to take advantage of automatic bill pay whenever possible.
#10 Monitor Your Credit Profile
Checking the information on your business credit profile regularly helps you battle inaccurate information and dispute incorrect marks that could hurt your reputation as a borrower. And just like with your personal credit score, you can work directly with credit bureaus to dispute and correct any wrong information that appears.
What Are Your Next Steps?
Now that you’ve learned how to build a credit profile for your business, it’s time to take action. While building a strong profile doesn’t happen immediately, it doesn’t have to feel so daunting – especially when you bank with the right partner.
At First Service, we’ve been serving Houston for nearly 50 years. We know the unique challenges that business owners in our community face, and we have a number of products that we have created with them in mind. We offer several checking accounts, savings accounts, and even options for nonprofits looking for a strong commercial banking relationship. We also offer business loans to help you access the funds your business needs.