What is business credit and how it works?

Business credit is a summary of your business's financial history, representing its creditworthiness and financial muscle in the eyes of lenders, suppliers, vendors, and business partners. Well-established and healthy business credit allows your business to borrow money and access other financial products and services.

Let’s look at business credit in more detail: how it works, its importance, and how to establish and build strong business credit.

How does business credit work?

Business credit is essentially a measure of a business’s financial risk: its ability to repay loans and fulfill other financial obligations. It’s actually similar to personal credit, except it covers a much wider scope. Like personal credit, business credit is based on credit reports. A business credit report contains a myriad of general business and financial data about a company, including business history, classification (NAICS and SIC codes), annual sales, judgments, liens, payment records, loan accounts, and operational data.

This information is gathered and organized by credit bureaus, the main ones being Experian, Equifax, PayNet, and Dun & Bradstreet (DnB). Each credit bureau keeps a credit database with the information it compiles from the business itself, public records, credit reporting agencies, banks, lenders, insurers, and other sources. Every business is assigned a credit score based on the bureaus’ credit rating systems.

The importance of business credit

Business credit can significantly impact your company’s financial status, growth, and success in many different ways. Anyone can check your business credit through any of the credit bureaus. For instance, banks, lenders, suppliers, and vendors can review your business credit to see whether you qualify for business loans or other financing solutions with friendly terms, higher credit limits, or lower interest rates. Insurers may determine premiums and policy options based partly on the business credit. Also, investors and other businesses will probably look at the business credit before partnering with or contracting your business.

Generally speaking, healthy business credit earns you favor with financiers, insurers, B2B customers, and potential investors and business partners.

To most entrepreneurs, business credit means access to business loans and bargaining power over loan terms. But in addition to SMB loans, strong business credit opens up countless other handy credit-based financing options, such as:

  • Business credit cards - These provide your business with a revolving line of credit to meet various day-to-day expenses.
  • Retail credit - Some retailers allow businesses to purchase goods from their stores on credit, sometimes at zero interest.
  • Vendor credit - Most B2B vendors will let you buy now and pay later, usually with net-30 accounts or terms.
  • Service credit - You can make flexible payment arrangements with service providers for utilities such as internet connection, phone service, web hosting, and even professional services.
  • Supplier credit - Some suppliers may be willing to defer payments to a later date after a supply run.

How to build business credit

Good credit is a valuable business trait—a powerful bargaining chip in business relationships and opportunities. And the best part is that it doesn’t take much to build healthy business credit. Here’s all you need to do:

Register your business

The first step is to register your enterprise as a legitimate business. Ideally, incorporate your business as a limited liability company (LLC). An LLC keeps your business and personal identities separate, in the legal sense. You can also register as a sole proprietor or independent contractor through a DBA, but this won’t separate your personal and business assets, in which case your personal and business credit go hand in hand.

Once registered, get an Employer Identification Number (EIN). An EIN is not needed to establish business credit, but it's included in credit reports, and some financial transactions may require an EIN.

From there, open a bank account for the business and set up dedicated utilities such as a phone line, physical address (if possible), and directory entries. Credit bureaus will use this public information to populate your credit profile.

Anyone can check your business credit through any of the credit bureaus.

Get a D-U-N-S number

A D-U-N-S Number is a unique 9-digit code that identifies your business with the credit bureau, Dun & Bradstreet. If you don’t have a D-U-N-S number, you can simply apply for one from DnB. Other credit bureaus, including Equifax and Experian, also have similar business identifiers, but you don't have to explicitly request them.

Open accounts that report to credit bureaus

Payment history forms the bulk of any credit report. But not all payments make it into the final credit report. No lender or vendor is obligated to report payments or any other transactions to credit bureaus. So, some do while others don’t. You want to open trading and financing accounts with vendors, suppliers, or financial institutions that report payments to the various credit bureaus.

If none of your lenders or vendors register payments with the bureaus, you'll have a very low credit score or no business credit.

Make payments on time

Your business credit performance is largely based on the payment history. The more bills you pay on time (or early), the higher the business credit score. So makes sure not to delay or miss any payments because that will reflect poorly on your credit report.

Separate business and personal finances

A good rule of thumb when building business credit is not to mix personal and business finances. For instance, ensure that you make all business-related payments through the business's bank account; otherwise, those payments won't reflect in your business credit. Plus, mixing business and personal cashflows is generally bad business and financial management practice—it’s unprofessional and only complicates bookkeeping.

Monitor your credit score

It's important to keep track of your business credit record, ideally through the credit monitoring services provided by credit bureaus. Doing so will help you trace your credit progress and catch any mistakes that might affect your score. Lenders, vendors, and the bureaus themselves can unintentionally report inaccurate information, which you can simply dispute and get rectified.

Many people believe that monitoring business credit will lower the credit score. But that’s not entirely true. There are two types of credit queries: hard and soft inquiries. A hard inquiry happens when you apply for a new line of credit, business loan, or other types of debt. This can have a minimal but temporary effect on your credit score.

On the other hand, soft inquiries are made by lenders and vendors when reviewing your business credit. A soft query also occurs when you check your business’s credit status through either a direct request or credit monitoring tool. Soft inquiries do not affect your business credit.

However, keep in mind that credit inquiries stay on your record for up to two years. And although they may not affect your business credit performance, too many inquiries over a short time period can be seen as a red flag.

Leverage your business credit with Lendzero

Unproven start-ups and SMBs usually struggle to secure financial deals and business loans with favorable terms, limits, and interests, if any at all. And although strong business credit does give you an upper hand in financial negotiations, that’s only one piece of the puzzle. Getting funding as an SMB or start-up is still a hassle, even with good business credit. You have to go through a pile of paperwork, research the available financing options, compare lenders, and negotiate loan terms to get favorable deals. Doing all this takes a great deal of time and effort and gets in the way of running your business.

Luckily, you don't have to endure this cumbersome process every time you need financing. Lendzero simplifies the loan application process by presenting you with pre-negotiated financing deals from multiple lenders. Get the best possible deals on SBA loans, term loans, lines of credit, business credit cards, and more without endlessly haggling with lenders. It's simple, quick, and convenient; get approved today.

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