Credit is a necessary part of life. For small business owners, it can be the difference between staying in business and closing the doors. What few new entrepreneurs understand is that just like with personal credit, it takes time to build a strong credit history and credit rating. But that is where the similarity ends. Business credit, the way that it is granted and the way that credit ratings are calculated are completely different than personal credit.
Dunn & Bradstreet Credit Files
Dunn & Bradstreet (D&B) is the source for business credit ratings and history. If you have not yet done so, it is imperative that you start a business credit file with D&B. The first step is to apply for a “D-U-N-S” number. Through the online process, you will be asked for a variety of details about your business. Answer truthfully and completely. Vendors, investors and even customers probably will check your business credit history from time to time. Unlike a personal credit report and FICO number, business credit ratings through D&B take into account a wide array of factors, above and beyond just payment history and available credit. Some of the 150 or so criteria that goes into a D&B business credit history include:
- Industry
- Location
- Number of employees
- Revenue
- Public records
- Sales
- Working capital
- Pending legal action
- Collateral
- Key management information
Establishing Business Credit
One of the quickest ways to start establishing credit in the name of your business is to get a telephone line in the name of your business. Even if you are just starting out and working from home, by adding a business phone line, Internet connection and a mobile account in the name of your business, you are establishing valuable credit history. Business bank accounts are also a necessity. Many banks and credit unions today will be happy to help you open a business bank account with even a small deposit. Once you have started to build your credit history, it is time to look for a corporate credit card. While the business card may have to be personally guaranteed if you lack adequate business credit history, it is still important that you have a credit card in the name of your business. A line of credit at your bank or credit union that is attached to your business checking accounting is another great way to build credit history for your business.
Managing Business Credit
Once you have established business credit, you must use it judiciously. Don’t make the mistake of running out and purchasing new equipment that you really don’t need or buying lunch for all of your friends. Use your business credit as necessary but do your best to leave a “slush” fund available in the event a financial emergency arises. Just like with personal credit, it is essential that you pay your bills on time. Pay your corporate credit card and line of credit bills within the 30-day window; pay your rent or mortgage on your office on time and your suppliers. Even if you are paying all of your bills on time, it is essential to regularly check your D&B credit report. Just like with personal credit reports, errors do occur and it is imperative that you get ahead of any challenges that may arise as a result of an error.
Check the Credit History of Those You do Business with
Small businesses have a tendency to select vendors, investors and partners based on gut and personal relationships. This can be a dangerous practice. Prior to doing business with anyone, be sure to check the business credit history.
Developing a strong business credit history now can mean the difference in your business financial health. A good credit history can lower the interest rate on credit cards and lines of credit by over 10%. Instead of paying interest, pay yourself, reinvest in your business or save it for a rainy day. Engage an accountant to help you reconcile your accounts, with payroll, tax preparation and more. The financial health and success of your business depends on accurate accounting and a strong business credit history.
