Regardless of how long you’ve been in business, building and maintaining good business credit makes it easier to get financing from a bank, a vendor, to buy business vehicles, and to access business credit for other business needs. Many business owners who have previously avoided borrowing capital are surprised to learn it hurt their ability to obtain financing when they needed it. Although they may have been cash positive and not needed to borrow, they never established business credit—making it very difficult for a lender to determine their creditworthiness—and even more difficult to qualify for a loan.
In addition to monitoring your business credit, they offer a number of other small business credit services that include credit risk management, the ability to check a potential customer’s credit profile, along with industry-specific data to help you identify potentially risky customers—more importantly, all those services are available to the vendors and other lenders who are evaluating you.
The Three Business Credit Bureaus Look at Your Credit Differently
While the personal credit bureaus all use the same basic score, the three business reporting bureaus all use different scores and focus on slightly different aspects of your credit profile. Because they focus on slightly different things, it’s important to understand the differences.
Dunn & Bradstreet
After years of monitoring business credit (since 1941), Dunn & Bradstreet’s credit score is primarily based upon how a business interacts with its vendors (trade data). They look at how delinquent a business might be when paying their vendors and applies a 100-point score they call the D&B PAYDEX® to demonstrate how timely a business pays their bills. The higher the score the better.
They also look at other business-to-business data, bank data, and other information pulled from the public record, but their score is weighted toward trade data.
Equifax is the platform that transforms data collected by the Small Business Finance Exchange (SBFE) into a business credit report. The SBFE is where most banks report loan data, so the Equifax report is a reflection of how a small business owner makes credit card payments, repays a small business loan or a line of credit.
Equifax does monitor other business data like D&B, but it’s rating is weighted toward how a small business interacts with traditional financing.
The Experian business credit report could be considered the most balanced of the three. They use a 100-point score like D&B, but their focus is not on trade data. They collect a lot of bank data, and they also look at trade data and the public record. Some small businesses don’t use a lot of trade credit, but rely heavily on the bank, others don’t access capital through the bank, but rely on terms from their vendors to do business. Everyone else does both.
How to Establish, Build, and Improve Your Business Credit
Even though all three credit bureaus take a different approach to how they calculate a business’ credit worthiness, there are several things a small business owner can start doing right now to establish, build, and improve his or her business credit score.
1. Know your score: Just as important as knowing your personal credit score is to buying a new car or a home mortgage, it’s important to know where you’re starting from as you begin to establish your business credit score. Unlike checking your personal credit score however, it isn’t free, but it’s worth every penny. All three business credit bureaus make it fairly simple on their website to contact them and unlike enquiries on your personal credit score, it doesn’t hurt your business score to periodically monitor your business profile.
2. Use business credit for business purposes and personal credit for personal use. For example, using a personal credit card for business purposes doesn’t do anything for your business profile—and may even hurt your personal credit score. Credit card companies report when you use credit, not when you pay it off. Among other things, the reporting agencies evaluate how much credit you have verses how much credit you use, which hurts your personal score if you regularly charge your cards to the max with business expenses.
What’s more, because most credit cards report on your personal credit report, it’s important to make sure your business credit cards report to the business bureaus to ensure your business is building good credit.
3. Apply for a Home Depot or Staples credit card: An easy way to establish business credit is to look for easy ways to get started. Companies like Home Depot and Staples (and there are others), both offer credit cards, offer products that most small business owners need, and can help you build your business credit. The application process is fairly simple and because they report to the business credit bureaus, every time you use the card and make timely payments, it’s building your business credit
4. Make sure your vendors and lenders are reporting to the credit bureaus: Ask your vendors if they report your credit use to D&B, Equifax, and Experian. If you’re paying your vendors promptly and they aren’t reporting, you may be building good credit with the vendor, but you’re not doing anything to help your credit score.
There are some lenders that don’t report to the credit bureaus too. If you make your loan payments on time and it isn’t reported to the bureaus, you’re not building your business credit. Make certain you ask if they report. If you want to build a better business credit profile, this would be a factor in determining whether or not you wanted to work with any particular lender.
5. Use the credit you need and make sure you stay current: It’s not uncommon for small business owners to sometimes rob Peter to pay Paul. The 100-point D&B PAYDEX score for example, clearly categorizes how promptly you pay your vendors on a scale from “anticipates” to longer than 120 days. If you’re regularly paying vendors 60 days over agreed upon terms, new vendors are less likely to offer you payment terms (credit). And, a banker who looks at your poor PAYDEX score will likely not approve your application either.
Nevertheless, staying current is not always as cut-and-dried as you might think. Business credit cards for example, aren’t regulated by the CARD act the same way personal credit cards are. One of the ways they differ is they aren’t required to bill you at the same time every month. A bill could potentially arrive at a time outside your normal payment cycle and be past due if you wait until the next cycle. If the card issuer gives your business 20 days to make a payment and you wait until 12:01 am on the 21st day, your payment is late and they will report the late payment, add additional fees and interest, and likely void any special low-interest rate offers that may have applied—not to mention, ding your business credit score. So making sure you are current is something you need to be watching every day.
6. Review your business credit score and make sure it’s current and up to date: The credit bureaus are only relevant if the information they report is accurate. That means if you find errors on your report, they want to fix the information. That doesn’t mean you won’t need to validate that the information in question really is inaccurate. They’ll likely ask you for documentation that demonstrates that their information is incorrect, but they will correct any information that is truly inaccurate.
Like your personal score, your business credit score is a precious asset, which over time will help you access the capital you need to fuel growth and fund working capital. The first step is to know your score; the second is to implement the business practices that will help you build a great business credit profile.