We recently discussed the impact your personal credit score has on your ability to qualify for a small business loan and the options a strong score makes available compared to a weaker score. Although there is some confusion about whether or not every small business has a credit profile (in addition to a personal credit score.)
If your business is a registered business, including sole proprietorships, along with your personal credit score, your business will have a business credit profile.
Small business owners in the United States have two profiles, their business credit profile along with their personal credit information. Because a business owner’s personal credit score is usually a part of any creditworthiness decision-making process, I am often asked to explain the business credit “score” and how that impacts a small business’ ability to qualify for a loan. While the different credit bureaus do score a business’ credit (Dun & Bradstreet’s Paydex Score is a good example), there is no universal business credit score, but rather a collection of scores and information that make up a small business’ credit profile.
What’s Included Within a Business Credit Profile?
Any time a potential lender reviews your business credit profile, they see:
- General information about your business like your address, your industry, your number of employees, how long you’ve been in business, and your size
- Information about your business’ credit relationships with suppliers
- Your payment history with any current business loans or business credit cards
Business credit bureaus like Experian, Equifax, and Dun & Bradstreet pull information about your business from the public record and your business credit history. Most lenders are also interested in information like your cash flow, your annual revenue, your time in business, the industry you’re in, and whether or not you have specific collateral. Some of this information is included in your business credit profile.
In addition to the credit performance of your business, your business credit profile will also include credit information about your industry and the credit performance of your peers. It will likely report on the potential for financial stress for your business and will compare your business to others in your region, businesses about the same size as you, and businesses that have roughly the same time in business.
In a nutshell, your business credit profile could be considered an aggregation of all this data to provide a potential lender with the information they need to make a credit decision about how your business will meet its credit obligations in the future, based upon what it has historically done in the past.
It’s important to understand the information included in your business credit profile and how that information is used to make credit decisions about your business—and how it differs from your personal credit score.
What Can You Do to Build a Strong Profile or Improve a Weak One?
This is another question I often get when meeting with small business owners when talking about business credit. There are five things you can start doing today that will help you build a strong business credit profile. While a good profile is no guarantee of a small business loan, it will make options available to your business that might not otherwise exist for a business with a weak profile.
1. Know Your Profile
If you don’t know what the credit bureaus are reporting about you and your business, it’s hard to make any changes to make it stronger. What’s more, because some of this data is pulled from public sources, it’s not uncommon for there to be mistakes or errors within your business profile.
Fortunately, the credit bureaus are motivated to ensure the information they have about your business is as accurate as possible. Therefore, any errors you discover that are verifiable, they will correct.
Additionally, I recommend you review your profile on a monthly basis. It’s human nature to impact the metrics we pay attention to, and your business credit profile is no different. In a conversation with Levi King, co-founder of Nav—a company that helps small business owners monitor their credit, he mentioned a recent study they conducted that suggested those business owners who regularly reviewed their profile were 30 percent more likely to qualify for a loan.
2. Don’t Use Your Personal Credit for Business Purposes
There are a couple of reasons this is important. It doesn’t help build your business credit profile and may even hurt your personal credit score.
Because the personal credit bureaus don’t report your personal credit usage, none of that credit history will benefit you. What’s more, because 30 percent of your personal credit score is a reflection of how much credit you access—your debt to credit limit ratio, if you regularly max out your personal credit cards on business expenses, it could hurt your personal credit. This is true even if you pay the balance down to zero every month. Because your personal score will likely be part of the equation, it’s important to avoid practices that have the potential to hurt your personal credit score.
3. Establish Trade Accounts with Your Suppliers
Although vendor credit (or payment terms) aren’t really a small business loan, those 30- or 60-day terms are relatively easy to get and will help you build a strong business credit profile pretty quickly.
Don’t just assume your suppliers don’t offer credit terms. Ask. If they don’t, companies like Home Depot and Staples offer credit to their business customers, and they offer many products that most businesses use on a regular basis.
4. Make Sure Your Suppliers Report Your Good Credit Behavior
If they don’t report, it may help you with that particular supplier, but it won’t help your business credit profile generally. You may want to consider asking potential vendors as part of your vetting process—it can be an important strategy to build your business credit profile.
5. Use the Credit You Need and Stay Current
This is probably the single most important thing you can do. Your business credit history, described in simple terms, is a collection of both positive and negative (if there are any) notations in your profile. If the positives outweigh the negatives your profile will improve. It might not happen overnight, but you might be surprised at what a concerted effort over six to 12 months can do.
If you have a struggling profile, there are no quick fixes. In fact, beware of companies that claim they can fix your profile by changing your tax ID or creating a new business identity. Not only is it legally questionable, it doesn’t take the credit bureaus long to find out your trying to game the system—which could really hurt your profile.
A strong business credit profile might not be a guarantee that you’ll get the loan you’re applying for, but it will give you options and help you know where to look to improve the odds of success.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.