All about credit for business
Business credit differs significantly from personal consumer credit, and industry insiders suggest that as few as 1 in 10 entrepreneurs know the difference. If you're an entrepreneur looking to establish trade credit, you need to understand how it differs from consumer credit and what techniques you can use to boost your business credit rating.
Business Credit versus Consumer Credit
It's helpful to look at the ins and outs of consumer credit as a way of understanding small business credit. When you're given a Social Security Number and take your first job or apply for your first credit card, credit reports are started in your name at each of the three major credit reporting bureaus: Experian, Equifax and TransUnion.
Each time you apply for a credit card or a loan, make or miss a bill or loan payment, change your address or permit someone to do a credit check on you, information is added to your credit file. Over time, your personal credit report becomes a tool financial institutions use to gauge your ability to repay loans and debts.
Credit for small business works similarly, except that it is tracked using your business' name and federal tax identification number (FIN). Agencies that track credit for business include Experian Business, Equifax Business, Dun & Bradstreet and Business Credit USA.
The key difference between consumer credit and business credit is that all transactions involving trade credit are reported voluntarily. Your business might actively solicit loans and credit transactions for years without anything showing up on your business credit report. As a business owner, it's up to you to be proactive in order to generate a credit history.
Boost Your Business Credit Rating
Scores on your business credit report are presented on a scale of 0 to 100 (as opposed to consumer credit, which is scaled from 300 to 850). Your credit score is influenced by more factors than just whether or not you pay your bills on time. In fact, when it comes to business credit, your debt-to-credit ratio is equally, if not more, important. This ratio reflects how much available credit you have; the more, the better.
Here are some tips to help you generate better business credit:
- Incorporate or form an LLC as opposed to a sole proprietorship. Your personal credit can be affected on a business credit application if you're a sole proprietor or a partner.
- Take the initiative to register your business with the four major business credit bureaus. Keep in mind that oversights like the lack of a physical address or a business phone number will negatively affect your business credit rating.
- Locate financial institutions that are willing to extend small business loans or other forms of credit even though your business hasn't yet established a credit rating.
- Make sure you meet all your loan obligations, and ask your creditors to report your good payment history to the business credit reporting agencies.