Don’t lose any sleep over your small business credit standing. Its importance pales in comparison to your personal credit due to a combination of murky liability rules for business-branded loans and lines of credit and the business-to-business nature of corporate commerce.
For starters, little differentiation exists between business and personal finances as far as credit bureaus are concerned. It’s a different story for large corporations, which have certain other forms of credit at their disposal, but all major credit card companies use personal credit data to make small business credit card approval decisions. They also relay monthly account information to cardholders’ personal credit reports and hold them personally liable for unpaid balances. Small business loan underwriting is based primarily on personal credit as well.
What’s more, most lending also takes place on the personal level. Consumers typically owe money to banks and a handful of large utility companies, while businesses tend to owe money to other businesses. As a result, business credit reports and scores are used more to perform due diligence on suppliers, rather than for loan underwriting.
Finally, the business credit market suffers from a debilitating lack of unique information. The vast majority of what’s in a small business credit report is also contained in an owner’s personal file, which is much more heavily relied upon by prospective lenders. Aside from some basic, publicly-available corporate filings, the rest – largely vendor-sourced payment information – is typically provided by a limited number of participating merchants or on a self-submit basis.
With that being said, credit reports and scores pertaining to your business are out there, and it would behoove you to know how they reflect upon your company. And with that in mind, we’ll delve deeper into the practical application of business credit below, in addition to providing tips for how to build your business credit report, check your current standing and recover from mistakes.
When Business Credit Matters
Based on our experience, the business credit reporting industry is quite poorly organized and plagued by spotty information on a company-by-company basis. Much of the information contained in these reports is actually self-reported by businesses themselves.
There are a few situations in which a company’s business credit standing comes into play, albeit to differing extents, and we’ll give you an overview of them below.
- Business Loans & Lines of Credit: Your personal credit standing will be more important in most cases, but business credit may carry some weight as well – particularly if your history is particularly good or bad.
- New Customer Vetting: A business may want to perform due diligence on your company – especially if you’re a vendor – before signing a contract or purchase order.
- Trade Credit Accounts: Vendors and suppliers may give you better payment and pricing terms if you have a strong repayment track record.
It’s important to note that this characterization conflicts somewhat with the party line purveyed by those involved in the business credit business. For example, here’s Experian’s take on the value of business credit.
“Business credit information is critical for any size business that is in need of securing loans or capital. Virtually all lending institutions leverage business credit as a key factor for making decisions on commercial lending terms,” Jordan Takeyama, public relations manager for business information at Experian, told WalletHub. “We recommend small business owners take the opportunity to monitor both to ensure their credit worthiness.”
How To Build Business Credit
The fundamental process of building credit doesn’t change based on whether you’re talking about personal credit or business credit. Either way, you still need to create a track record of responsible performance, only spending what you can afford to repay and always paying your bills on time.
There are, however, a few business-specific steps you can take to ensure your company is covered from all angles. And we’ll look at things from both perspectives below.
- Pull Your Business & Personal Credit Reports: Both are considered by lenders, so both deserve your time and attention. You’ll want to check and dispute errors, get a qualitative sense of your credit standing and make sure you haven’t become the victim of fraud.Keep in mind that while consumer credit reports are free at least once per year, you may have to pay for your business report. You should therefore refrain from buying your business credit report out of pure curiosity and instead wait to do so unless you’re planning to soon apply for a loan.
- Have Both Personal & Business Credit Cards: Both personal and business credit cards will boost your personal credit standing, as both types of accounts relay information to consumer credit reports on a monthly basis. But since personal credit cards typically aren’t listed on business credit reports, it’s best not to go without a business-branded card.
- Always Pay On Time: Missing payments is the easiest way to damage your credit standing. A long string of on-time payments, on the other hand, projects financial stability. Setting up automatic payments from a bank account is the best way to ensure you’re never late. You’ll be able to choose to pay the minimum amount required, your total balance or a custom amount.
- Minimize Credit Utilization: How much of your available credit you use each month – also known as credit utilization – informs lenders about how debt-reliant you are as well as how much credit capacity you have.
- Regularly Self-Report To Business Bureaus: Business credit reports all rely on self-reported information to varying extents. If a particular bureau will allow you to report information about your own company, and you don’t mind it becoming public, you’ll be able to pad your file with information that you control, perhaps distracting from certain negative items that might otherwise stand out in a thin file.
- Pay Your Taxes & Avoid Lawsuits: It’s not just loans and lines of credit you have to worry about when it comes to small business credit reporting. Given that tax liens and court documents are public information, they are some of the easiest data points for credit bureaus to collect about companies. They also represent major red flags.
- Be Careful When You Owe Big Companies: You already know the importance of responsibly managing loans and lines of credit, whether business or personal in nature. The other main thing that can affect your corporate credit standing is vendor-reported payment information. Many large companies report vendor payment and financing data to the major credit bureaus the same way that a bank would. As such, taking extra precautions to make sure this information is positive is a must.
- Build An Emergency Fund: A financial safety net helps reduce some of the risk posed by the uncertainty of the future and ensures that you’ll be able to pay your bills even when times are tough.
How To Check Your Business Credit Report
Unfortunately, the Fair Credit Reporting Act – the law that provides for free annual credit reports – applies only to consumers and not to small businesses. There is no government-sponsored program to distribute free business credit reports.
You can, however, purchase your business credit report from one of the major providers, like Experian or Dun & Bradstreet. We don’t recommend doing so, unless you know for a fact that a client or lender will be checking the same report soon, simply given how infrequently these reports are used.
You can check out sample credit reports from Experian and Dun & Bradstreet in our Business Credit Report & Score Guide.
What Happens When You Have Bad Business Credit
Having bad credit, whether business or personal, will ultimately cost you. Bad personal credit standing is particularly expensive, as it will lead to worse credit card and loan terms in addition to higher insurance premiums and greater difficulty renting an apartment or getting certain jobs. Bad business credit could end up costing you a deal or complicating borrowing efforts, but its impact should be limited given how little-used business credit scores and reports are.
The best thing to do in the face of bad credit is begin devaluing negative items in your credit files as soon as possible. Your first step should therefore be to pull your credit reports to see exactly what those items are. Disputing inaccurate records and making up missed payments in order to change the status of the accounts from “delinquent” to “paid” are the next steps. And, finally, you’ll want to make sure you have at least one open credit card account that is in good standing. Paying its bill on time every month and maintaining reasonable credit utilization will result in positive information being added to your major credit reports each month, gradually lessening the impact of negative records.
Ask The Experts: Why Is Business Credit Reporting So Bad?
We turned to a panel of leading business and credit industry experts for a deeper look at the significant differences and similarities that exist between personal and business credit reporting. You can check out the questions we asked in addition to the experts’ bios and responses below.
- Why do most lenders use the personal credit standing of small business owners to evaluate them for loans and lines of credit?
- Why is “business” credit so little used?
- What are the best things that small business owners can do to improve their access to credit?
Ask the Experts
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