Establishing Business Credit: What It Is, Why It’s Important, and How to Build and Maintain It

Establishing business credit is an essential part of building a successful company. A solid business credit profile can help your business secure loans, credit lines, and other financing options, which can be crucial for growth and expansion.

In this ultimate guide, we will walk you through everything you need to know to establish business credit, including what it is, why it’s essential, and how to build and maintain it.

Establishing Business Credit

Business credit measures a company’s ability to repay debts and obligations. It is similar to personal credit in that it is a numerical score assigned to a business based on payment history, credit utilization, and length of credit history.

Business credit scores are provided by credit reporting agencies such as Dun & Bradstreet, Experian, and Equifax.

Dun & Bradstreet’s Paydex Score

Dun & Bradstreet‘s Paydex score is a numerical rating system used to measure a business’s payment performance. It is a proprietary score developed by Dun & Bradstreet, a leading business credit information and insights provider.

The Paydex score is a three-digit number ranging from 1 to 100, with higher scores indicating better payment performance. The score is based on a business’s payment history with its vendors and suppliers. Specifically, it considers how promptly a company pays its bills and invoices.

To calculate the Paydex score, Dun & Bradstreet looks at a business’s payment history over the past year. They assign a score to each payment based on how quickly it was made. 

For example, if a payment were made within 30 days of the due date, it would receive a score of 80. If made within 60 days of the due date, it would receive a score of 70. If made within 90 days of the due date, it would receive a score of 60. And so on.

Once a business’s payment scores are calculated, they are averaged together to produce the Paydex score. A score of 80 or above is considered good, while a score below 50 is considered poor.

The Paydex score is commonly used by lenders, suppliers, and other creditors to evaluate the creditworthiness of a business. A high score indicates that a business is reliable and pays its bills on time, which makes it more likely to be approved for credit or receive better payment terms from suppliers.

In addition to the Paydex score, Dun & Bradstreet also provides other business credit ratings and insights, such as the Delinquency Predictor Score, the Financial Stress Score, and the Credit Limit Recommendation. 

These scores and insights can help businesses make informed decisions about extending credit to other companies and managing their creditworthiness.

Experian’s Intelliscore Plus

Experian’s Intelliscore Plus is a credit scoring model that provides lenders with a quick and objective way to assess the creditworthiness of a potential borrower. The score is calculated by analyzing credit data from various sources, including credit bureaus, public records, and other financial institutions.

Intelliscore Plus was developed by Experian, one of the three major credit bureaus in the United States. It uses a complex algorithm to analyze an individual’s credit history, payment behavior, business financials, and public records. 

The score ranges from 1 to 100, with higher scores indicating lower risk and greater creditworthiness.

Some of the factors that are considered in the Intelliscore Plus model include:

1. Payment history includes whether an individual has made timely payments on their debts, the number of delinquent payments, and the severity of any delinquencies.
2. Credit utilization refers to the amount of credit an individual uses in relation to their total credit limit. Higher credit utilization can signify financial strain and may lower an individual’s score.
3. Length of credit history: This considers how long an individual has been using credit and how long their accounts have been open.
4. Types of credit used: This looks at the mix of credit accounts an individual has, such as credit cards, loans, and mortgages.
5. Recent credit inquiries include any recent credit applications, which may indicate that an individual is actively seeking new credit.

In addition to these factors, Intelliscore Plus also considers the size and age of a business and any public records related to bankruptcy, liens, and judgments.

Lenders use the Intelliscore Plus model to assess lending risk to a particular individual or business. A higher score indicates lower risk and may result in more favorable loan terms, such as lower interest rates and more significant loan amounts. 

Conversely, a lower score indicates higher risk and may result in less favorable loan terms or a denial.

Intelliscore Plus is a comprehensive credit scoring model that provides lenders with a quick and objective assessment of an individual’s creditworthiness. 

By considering various factors related to an individual’s credit history and financial behavior, the model helps lenders make informed decisions about lending and risk management.

Equifax Business Credit Report

Equifax is one of the world’s largest consumer and business credit reporting agencies. As a business owner, you may need to obtain a business credit report from Equifax to assess the creditworthiness of your business or to make informed decisions about potential business partners or clients.

A business credit report from Equifax provides information on a business’s financial history and creditworthiness. The report includes a variety of data points, such as credit scores, payment history, public records, and financial data.

Here are some of the critical components that may be included in an Equifax business credit report:

1. Business Information: This section provides basic information about the business, such as the name, address, phone number, and industry classification.
2. Credit Summary: This section provides a high-level overview of the business’s credit history, including the number of credit accounts, the total credit limit, and the balance on those accounts.
3. Payment Trend: This section shows the business’s payment history over time, indicating whether the business is making payments on time or is behind on payments.
4. Public Records: This section shows any legal actions or bankruptcies associated with the business and any tax liens or judgments.
5. Credit Score: Equifax uses its proprietary credit scoring model to generate a credit score for the business. The score ranges from 101 to 992, with higher scores indicating better creditworthiness.
6. Credit Inquiries: This section lists companies or individuals who have requested the business’s credit report in the past two years.
7. Financial Statements: This section summarizes the business’s financial statements, including income statements, balance sheets, and cash flow statements.
8. Trade Payment Information: This section shows the business’s payment history with suppliers and vendors.

Equifax business credit reports can be accessed online through Equifax’s website or various other business credit reporting services. There is typically a fee associated with accessing a business credit report.

An Equifax business credit report provides valuable insights into a business’s creditworthiness and financial history. 

It can be a useful tool for business owners, lenders, and other stakeholders when making decisions about financing, partnerships, and other business relationships.

Why is Business Credit Important?

Business credit is important for several reasons:

1. Access to Funding: Lenders use a business’s credit score to determine whether or not to approve a loan or line of credit. A strong credit score can help businesses secure more favorable loan terms and interest rates.
2. Vendor Relationships: Many vendors and suppliers require businesses to have a certain level of credit to establish a business relationship.
3. Insurance Premiums: Insurance companies may use a business’s credit score to determine premiums for certain types of coverage.
4. Business Partnerships: A strong credit score can help businesses establish partnerships and joint ventures with other companies.

How to Build Business Credit from Scratch

If you’re starting a new business, you must establish a business credit profile from scratch. Here are some steps to take:

1. Incorporate Your Business: To establish a business credit profile, you must incorporate your business as a separate legal entity.
2. Obtain a Federal Tax ID Number: You’ll also need to obtain a Federal Tax ID Number (also known as an Employer Identification Number or EIN).
3. Open a Business Bank Account: Open a separate business bank account to keep your personal and business finances separate.
4. Apply for a Business Credit Card: Apply for a business credit card and use it responsibly. Pay your bills on time and keep your balance low.
5. Establish Relationships with Vendors: Work with vendors who report payment history to credit bureaus. Make sure to pay them on time.
6. Monitor Your Credit Score: Regularly check your credit score with credit reporting agencies to ensure your business credit profile is accurate.

Vendors that report payment history to credit bureaus to help establish business credit:

1. Uline
2. Quill
3. Grainger
4. FedEx
5. UPS
6. Office Depot
7. Home Depot
8. Lowe’s
9. Staples
10. Verizon Wireless

Please note that this list is not exhaustive, and other vendors may also report payment history to credit bureaus. It’s essential to do your research and due diligence to find vendors to report your payment history to credit bureaus.

How to Maintain a Good Business Credit Profile

Once you’ve established a business credit profile, it’s important to maintain it. Here are some tips:

1. Pay Your Bills on Time: Late payments can hurt your credit score. Make sure to pay your bills on time.
2. Keep Your Credit Utilization Low: Credit utilization is the percentage of your available credit that you’re using. Keep your credit utilization low to maintain a good credit score.
3. Monitor Your Credit Report: Regularly review your credit report to ensure accuracy. Dispute any errors you find.
4. Build Relationships with Creditors: Building strong relationships with creditors can help you negotiate better loan terms and interest rates.
5. Stay Organized: Keep your financial records organized and up-to-date to make it easier to manage your finances and maintain a good credit profile.

Where Can You Access Your Business Credit Report?

There are several business credit reporting agencies that you can use to access your business credit reports. Some of the most popular ones include

1. Dun & Bradstreet (D&B): If your business has a D-U-N-S number, you can request a free Dun & Bradstreet credit report for your business. You can do this by visiting their website and completing the necessary information.
2. Experian: Experian offers a free business credit report through its BusinessCreditFacts service. You can request your report by visiting their website and providing the necessary information.
3. Equifax Small Business Credit Reports
4. Nav: Nav is a service that provides free access to your business credit reports from Dun & Bradstreet, Experian, and Equifax. You can sign up for a free account on their website to access your reports.
5. CreditSignal: CreditSignal is another service provided by Dun & Bradstreet that allows you to monitor your business credit report for free. You can sign up for an account on their website to receive alerts when there are changes to your credit report.

In addition to these major credit reporting agencies, smaller business credit reporting companies may offer similar services. You can search online to find other companies specializing in business credit reports.

Factors That Impact Your Business Credit Score

As a business owner, it’s important to understand that your credit score doesn’t only impact your personal finances but also your business. Similar to personal credit scores, business credit scores are a way for lenders and other financial institutions to evaluate the creditworthiness of your business. A good business credit score can help you secure loans, credit lines, and other financing options, while a poor score can make it difficult to access funding or increase the cost of borrowing. Here are the factors that can impact your business credit score.

Payment history

1. One of the most important factors that impact your business credit score is your payment history. Lenders and other financial institutions use payment history to evaluate the likelihood of your business repaying its debts. Late payments or delinquent accounts can have a negative impact on your credit score, while consistent, on-time payments can improve it.

Credit utilization

1. Credit utilization refers to the amount of credit you use compared to the amount available. A high credit utilization ratio can indicate to lenders that your business is struggling financially and may have difficulty repaying its debts. Keeping your credit utilization ratio low is an excellent way to improve your business credit score.

Length of credit history

1. The length of your business’s credit history can also impact your credit score. Lenders prefer businesses with a long credit history, indicating stability and reliability. If your business is new, establishing a credit history can take some time, but consistently making payments on time can help build your credit score.

Type of credit

1. The types of credit you use can also impact your business credit score. For example, secured loans or lines of credit may be viewed more favorably than unsecured credit. Lenders may also prefer businesses with a mix of different types of credit, such as a combination of loans, lines of credit, and credit cards.

Public Records

1. Public records, such as bankruptcies, liens, and judgments, can have a negative impact on your business credit score. These records can indicate to lenders that your business is struggling financially or has had legal issues. It’s important to avoid these types of records or work to resolve them as soon as possible.

Industry risk

1. Finally, the risk associated with your industry can also impact your business credit score. Some industries are considered more high-risk than others, such as those highly regulated or prone to economic downturns. Lenders may view businesses in these industries as riskier and be more cautious about extending credit.

In conclusion, your business credit score is an important factor to consider as a business owner. Understanding the factors that impact your credit score can help you take steps to improve it and access the financing you need to grow and thrive.

How to Fix Errors on Your Business Credit Report

You can dispute errors with the credit reporting agency if you find errors on your business credit report. Here are the steps to take:

1. Identify the Error: Review your credit report to identify any errors.
2. Gather Evidence: Gather any evidence that supports your claim, such as payment receipts or invoices.
3. Submit a Dispute: Submit a dispute with the credit reporting agency. Include all relevant information and evidence.
4. Follow Up: Follow up with the credit reporting agency to ensure that your dispute is being processed.
5. Review the Results: Once the dispute is resolved, review your credit report again to ensure that the error has been corrected.

How to Negotiate Better Loan Terms

Negotiating better loan terms can save your business money in the long run. Here are some tips to help you negotiate better loan terms:

1. Know Your Credit Score: Know your business credit score before negotiating a loan. A higher score can help you secure better loan terms.
2. Shop Around: Don’t accept the first loan offer you receive. Shop around to find the best loan terms for your business.
3. Highlight Your Business’s Strengths: Emphasize your business’s strengths when negotiating with lenders. This can help you secure better loan terms.
4. Be Prepared: Prepare a business plan and financial statements to show lenders your business is financially stable.
5. Consider Collateral: If you have collateral, such as property or equipment, you may be able to secure better loan terms.

Other Relevant Topics

Here are some other topics to consider when building and maintaining a strong business credit profile:

1. Business Credit vs. Personal Credit: Understand the difference between business and personal credit. Keep your personal and business finances separate.
2. Credit Monitoring Services: Consider using a credit monitoring service to keep track of your business credit score and report.
3. Building Credit as a Sole Proprietor: If you’re a sole proprietor, you can still build a business credit profile. Apply for a business credit card in your business name, and pay your bills on time.

Conclusion

Establishing and maintaining a strong business credit profile is essential for securing financing and building relationships with vendors and other businesses. 

Following the steps outlined in this article, you can build a strong business credit profile and negotiate better loan terms for your business. 

Remember to regularly monitor your credit score and report, and stay organized to maintain a good credit profile.