Digital Marketing

Establishing business credit: the seven steps to success

Business credit versus personal credit:

Personal – Building personal credit begins when a person provides their social security number and applies for their first credit card. At that time, a credit profile is initiated with the personal credit reporting agencies of the region of the country in which they reside. This profile, also commonly known as a “credit report,” is created with every credit inquiry, credit application submitted, address change, and job change. The information contained in the report is generally reported to the credit bureaus by those companies that issue credit. Over time, the credit report is considered a statement or report of a person’s ability to pay a debt and is the key tool for accessing and granting credit.

Business – When a company issues another trade credit, it is called trade credit (vendor or supplier credit). Business or business credit is the world’s largest source of loans, but most small businesses do not report to business credit bureaus. Data related to business credit transactions must be submitted and then aggregated by the business credit bureau to create a business credit report using the business name, address, and federal tax identification number (FIN). Credit bureaus use this data to generate a historical report on a company’s business credit transactions and payment history. Generally, companies that issue credit rely on the company’s credit report to determine the credit they are willing to extend and the amount of the credit limit. Additionally, many companies (vendors / vendors) will submit credit reference requests to key company vendors as a method of obtaining payment patterns as part of the credit granting process.

The main credit bureaus are:

  • Dun & Bradstreet
  • Trade credit USA
  • Corporate Experian
  • Equifax for small businesses
  • TransUnion (personal)

Information provided to business credit bureaus (mainly D&B) is sent voluntarily, as companies are not required to report. Therefore, the credit reporting agencies may never receive information about business credit transactions, and a business could spend years building business history without reporting it to the credit bureaus and without establishing a positive business history of sound credit practices.

Establishment of business credit history:

Business credit scores range on a scale of 0 to 100, with 75 or more considered an excellent rating. Personal credit scores, on the other hand, range from 300 to 850 with a score of 680 or higher considered excellent. With today’s strictest credit scrutiny, the higher the credit rating, the more likely a person or business is to get credit and on more favorable terms (interest rate and contract length).

While it is important to know that there are many factors http://www.myfico.com that affect a credit rating; it relies on more than whether you pay your bills on time (still very important). The credit score will be affected by the amount of available credit you have on bank lines of credit and credit cards, the length of time you have had a credit profile, the number of inquiries made on your credit profile, the payment of bills on time , bankruptcy, as well as other considerations.

The typical American consumer credit report receives two to three credit inquiries per year and typically has 11 credit obligations, generally divided into 7 credit cards and 4 installment loans. Business owners are not your typical consumer, because they have both personal and business credit. This typically doubles the number of inquiries made to your personal credit profile and the number of credit obligations you have at any given time, all of which have a negative impact on your personal credit score. Also, because business inquiries and personal inquiries are not separated on the personal credit report, personal credit scores are adversely affected. As mentioned above, when using personal credit history to gain credit for your business, businesses are unable to build your business history / score, all of which could help gain critical business credit in the future.

A critical mistake many business owners make is using your personal information to apply for business loans, leases, and loans. This practice has the resulting impact of potentially lowering your personal credit score, while not building a business credit history and business credit score.

A key to establishing business credit and a profile and score is finding companies (UPS, FEDEX, etc.) or your key vendor and vendors that will grant credit for your business without using your personal credit information and then reporting payment experiences. to business credit bureaus. By reporting the information to the appropriate credit bureaus, those companies will help the business establish a business credit profile and score.

The seven steps to success:

1. Legal structure of the company – The company must be a legal entity in itself to be able to establish a commercial credit. Therefore, it is recommended to form a corporation (C Corp) or LLC (discuss with your CPA the advantages / disadvantages of a C Corp vs LLC) rather than structuring your business as a sole proprietorship or partnership. The formation of a sole proprietorship or partnership dictates that personal credit information could be included in the business credit report. Additionally, as the sole proprietor or partner of a partnership, you are personally liable for the debts of the business and all of your personal assets are at risk in the event of litigation.

Corporations and LLCs, on the other hand, provide liability protection to business owners and can build a business credit profile that is separate from the personal credit profile. Therefore, apply for credit under your business name and look for companies that grant credit without a personal credit check or guarantee.

2. Register with commercial credit bureaus – The best known business credit bureau is Dun & Bradstreet. Dun & Bradstreet has a process on their website to establish a DUNS number (a specific 9-digit number related to your business) and instructions on how to establish a business credit rating. It is highly recommended that you contact D&B and follow their process to establish business credit. The following is from the D&B website:

How do I get started with D&B? With our unsurpassed global data collection system, D&B continually collects the data that initiates business credit profiling at startups. Many types of activities can generate a profile on a new company, such as incorporating your business, applying for a loan, obtaining a business phone number, leasing an office space, even when another company seeks information from D&B about your business. . Still, a new business may not have a complete business credit profile. Obtaining a DUNS number from D&B, the worldwide standard for business classification systems, is an essential part of helping you establish your business credit profile and will ensure that when a business searches for it in the D&B database, they will find it. In some cases, a D&B DUNS number is a requirement to do business with some entities, such as the US government.

You should ensure that you have a D&B business credit profile if:

  • You are planning to obtain a business loan
  • You need to buy or lease equipment
  • Your cash flow is tight
  • You want to make sure you get a fair deal from lenders compared to your competition
  • You want to pay 30 days net instead of cash on delivery (cash on delivery)
  • You are paying interest to the principal plus 1, or even more
  • You plan to do business with entities that require a DUNS number, for example, the US government.

These issues and many others like them can be addressed by having a strong business credit profile. A good rating gives you the financial freedom to take the steps you need to grow, and is a simple and unbiased method for other companies to assess your level of risk when considering hiring you as a creditor. A bad credit rating is a barrier to growth and success, preventing you from obtaining adequate financing on fair terms.

Contacting D&B directly will help you establish business credit in less time. If you’re a new business, D&B can help you build a complete business credit profile from scratch; If you’ve been in business for a while, you’ll want to improve and / or protect your business credit profile. Learn more about establishing, monitoring, improving, or protecting your business credit.

3. Credit market requirements – Companies must comply with all the requirements of the credit market to have a greater probability of credit approval, since not complying with the credit market can “send signals” to both credit bureaus and potential credit grantors.

Some of the “light signals” include:

  • not have a business license,
  • not be registered with the Secretary of State to obtain a certificate of good standing,
  • operating with your social security number instead of a FIN or EIN,
  • not have a phone line (landline) listed in the phone book with the exact legal name of the business,
  • no website, or
  • not have a business email address (not AOL or gmail, but a URL specific to your business).

4. Lines of credit for small businesses – Investigate and locate a minimum of five businesses (vendors / suppliers) willing to grant credit to a small business without personal guarantees and will report their payment experiences to the commercial credit bureaus. This will help your business establish a credit report and create a financial credit base for the business. Find companies willing to grant credit that report to credit bureaus such as marketingoncredit.com, UPS, FEDEX

5. Business credit cards – Get three business credit cards (Sam’s Club Discover Business card), which are not linked to you personally and which report business credit to reporting agencies. So make sure you always pay your bills on time!

6. Financial statements, business plans and loan packages – These documents are often required by many lenders as part of their loan application process. CxO To GO is a national professional services firm that has assisted many companies with the preparation of their financial statements and business plans. Additionally, CxO To Go has packages like PowerPlan and PowerPlan2 for business plans, PowerPuncher for executive summaries, CFOCast for financial projections, and BankSell for bank proposals for lenders and bankers to take action. It is important to note that 61% of all businesses are denied a loan due to a poor loan package, however, with BankSell, the lender’s loan package gets results and moves the applicant to the top of the line. Ready for credit committee review and approval.

7. Debt management – Be a smart money manager and manage debt levels to make sure they are not too burdensome and can be repaid with current cash flow. Do not incur debts that excessively leverage the business and cause late or late payments.

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