What is Business Credit?

Recently, there has been an influx of interest from entrepreneurs and small business owners in relation to "business credit" At some point in your journey, you may have come across that term as well. But what exactly does "business credit" mean?

Written By 33.3 Media Marketing Admin Webmaster

On June 15, 2022

Read more

What is Business Credit?

Recently, there has been an influx of interest from entrepreneurs and small business owners in relation to “business credit” At some point in your journey, you may have come across that term as well. But what exactly does “business credit” mean?

Business credit, in short, is a company’s ability to buy something now and pay for it later. By establishing a strong business credit rating, your business will find a much easier time applying and getting approved to borrow money for working capital.

Business Credit Reporting Agencies

Before we dive into the ins and out’s of how business credit works and how to establish business credit, let’s cover some of the prerequisites first. Similar to personal credit, business credit is reported to three major bureaus. Equifax and Experian are still prevalent but have their own business departments for business credit reporting. Equifax’s Small Business department and Experian’s Business department are in charge of reporting the business’ payment history. The third major bureau is one not used for personal credit at all, rather than TransUnion, Dun & Bradstreet (D&B) is the third and most prevalent reporting agency.

While personal credit reporting agencies collect data about you personally, these business credit bureaus collect data about your company and how it manages its credit obligations. Unlike personal credit remaining private, meaning it is not accessible publicly, business credit reports are viewable by anyone. There is no right to privacy when it comes to corporate credit reports and the business credit bureaus can sell your credit information to anyone they wish.

The business credit bureaus collect their information once it is submitted by vendors (creditors/credit grantors) to create credit files for businesses. Once your business credit file has been established with a business credit reporting agency, your business credit report on your company can be created and sold to others who want to view it. Typically, vendors or lenders will want to access your company’s credit report when you are applying for business financing or lines of credit.

How to Establish Business Credit

In light of the mass information being presented online, there is an excess of unnecessary information that has skewed perceptions of those looking to get started. In our business credit builder and credibility builder programs, we will make sure that your business is credible and compliant in the eyes of lenders before beginning to obtain lines of credit under your business entity.

It is important to register your business with your Secretary of State. In many states, the part of the incorporation process you complete when you finish setting up your LLC or Corporation. After your business has been registered, you’ll need to request an Employer Identification Number (EIN) from the IRS. An EIN number is like a Social Security Number (SSN) for your company and will be used to identify your business when you pay taxes to the IRS.

Once obtained, you must attach your EIN to your business and that will allow you to open up your business bank account. Having a separate business bank account makes your company be seen as credible in the eyes of lenders and will be used to determine the health of your business by measuring the cash flow in and out of the account. It is also important to have to fully separate your business finances and personal finance separate to avoid accounting issues when the tax period comes to an end.

There are additional requirements needed, including a phone number, website, email, and more that is clearly illustrated in our Credibility Builder Program. Once your business has become credible and has completed the prerequisite list needed to begin adding lines of credit to establish business credit, there are 4 primary account types your business will try to obtain.

Types of Business Credit

Installment Accounts

Installment accounts are similar to conventional loans, however, they do differ due to the potential capital of being able to work with. This is where you borrow a fixed amount of money and repay the lender a fixed amount over a period of time-based on the agreement with the lender. Installment accounts also come with fixed interest rates, meaning your interest rates will not fluctuate or change from a month to month period.

Revolving Accounts

There are two main types of revolving credit, similar to personal credit, for your business which are lines of credit and small business credit cards. Revolving credit allows consumers to borrow money up to a preset credit limit and once the balance has been brought down, you are allowed to charge up to your credit limit again. This is only possible if you keep the account in good standing and do not miss any payments.

Revolving accounts allows your business to not have to pay the full amount charged in a given month, although it is highly recommended. Paying off the balance in full each month can help you avoid expensive internet fees and keep your credit utilization low, which in some credit scoring models, will reward you for maintaining a low utilization on your credit cards.

Vendor Accounts

Vender accounts allow your company to pay for products and services after you’ve purchased them. These accounts are also referred to as net-30 accounts. These accounts are designed so you can buy now and pay later, typically within 30 days, but there are some vendor accounts with net-90, net-60, net-15, and even net-7 accounts.

These vendor accounts are used to help your business stretch its cash flow, and add a positive trade line to your business credit report. Not every vendor will report to each and every bureau, in some instances they may report to one, two, all three, a combination, or none. Our exclusive vendor list will help you strategize your vendor applications to have the strongest tradelines added to your business credit report quickly.

Personal Guarantee

With many types of business credit, you’ll need to sign a personal guarantee (in the beginning) to open an account. A personal guarantee makes your co-signer for your business credit card, business loan, and business line of credit. What this means is that you personally guarantee that if the business fails to pay back the debt as agreed, you will be held personally liable to satisfy the debt.

Good personal credit is an asset when applying for business credit and can be the deciding factor in you qualifying for the line of credit. Do not sign a personal guarantee if you do not understand the risks associated. You will be putting your personal finances and credit on the line as collateral, and if your business cannot keep up with the payments and will fall on you to finish the payments.

Benefits of Business Credit

There are a plethora of benefits that come attached with having good business credit. Let’s dive into the biggest key points on why business credit is so impactful and useful for your business.

Keep your Personal Finances and Business Finances Separate

Separating your personal finances and credit from your business alleviates a lot of the stresses that come along with accounting for tax preparation. This also allows your business to fully form itself as an entity in order to begin obtaining lines of credit under the business name without it having to be attached to your personal credit. With the right age and development of your business, you will eventually not be required to sign a personal guarantor.

Qualify for Financing

On average, 20% of small business owners are turned down for business funding programs within the last five years. Although credit is not the only factor vendors, creditors, and lenders look at, having a strong business credit score and report drastically improves your odds of approval when filling out a business credit application.

Save Money

Just like personal credit, having strong business credit can lead to much lower insurance premiums, better interest rates and fees, and small deposits when you take out a new lease or service for your company. Your business will also have the opportunity to secure better trade terms for suppliers. Having poor credit results in the complete opposite of everything mentioned.

Increase the Value of Your Company

In the hopes to sell your business in the future or attract investors, having a strong business credit profile is an extremely strong selling point. This means your business has been established and has retained positive payment experiences for the duration of time your business has been active.

More Options

When your business is in a strong standing, you can afford the luxury of picking and choosing lines of credit you wish to obtain. You can also shop around for the best rates and offers different lenders have to offer.

Ready to begin taking the right steps in bringing your business to the next level? Schedule a call with one of our certified Business Credit Consultants so we can see where your business stands and what we will help you do in order to achieve Business Credit Success!