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If you own a business, chances are you’ve at least considered the idea of trying to get credit to help that business grow. Whether you’ve looked at a loan for startup expenses or expansion, a credit line for working capital, or a business credit card for day-to-day expenses, business credit can seem a bit confusing.
How exactly can you get business credit? And how much does your personal credit rating factor into it all? It turns out that while it’s a good idea to keep business and personal finances separate, the system of business credit sometimes overlaps with your personal credit for some lenders – and yet when other lenders look at your business, they might not care about your personal debt.
Your business’s credit rating is critical, even if you don’t plan to or want to use credit. Just like employers often check personal credit ratings, vendors and suppliers may check your business credit before deciding how long your invoice period will be. A vendor dealing with a small business that has strong credit might do a Net-60 or even Net-90 invoice, while a business with credit problems might only get a Net-30. Let’s take a look at the difference between business credit and personal credit a little more in-depth below.
Personal Credit Reporting
You’re probably already familiar with how personal credit works. There are three major reporting bureaus that handle personal credit, and while they generally report the same data, sometimes there are accounts that one bureau reports while another does not. As a result, the ratings between bureaus can vary slightly; usually, however, they stay within 20 points.
The three bureaus – Experian, TransUnion, and Equifax – report your credit rating to lenders looking to find out if you’re creditworthy. The numbers used in ratings run from 350 to 850, with higher credit ratings signified by a higher number. While some lenders will still offer credit to a subprime score (under 600), the interest rate will likely be significantly higher. Most lenders prefer to work with borrowers with a credit score of 620 or above, and some prefer much higher. Generally speaking, a score over 700 means getting not only approved, but getting offered the best interest rates as well.
With personal credit, lenders are looking at your personal ability to pay your financial obligations, such as an auto loan, mortgage, or credit card debt. Business credit, however, looks at your business’s ability to pay its separate obligations.
Business Credit Reporting
When grading business credit, the reporting agencies look at a number of factors, not unlike personal credit. Does your business have a line of credit or existing business loan? Your payment history on those will factor into your business credit rating. If your business operates out of a building or shop and you have overdue utilities or rent payments, those might also show up in a business credit check. Vendors or suppliers you’re late sending payments to can also report to credit agencies, and just like in a personal credit report, even one late payment can affect your rating negatively for quite some time.
Public records can also play a part in your business’s credit rating. Those records could include anything from a bankruptcy filing to news articles about your shop, or zoning permits showing an applied-for expansion. Sometimes those public records paint a picture about the health of your business just like your payment history does.
Most businesses have an EIN, or employer identification number. It’s used for taxes like a personal Social Security Number (SSN), but it’s also used for business credit reporting. Experian and Equifax also grade business credit, but Dun & Bradstreet is a reporting agency that deals only with business credit.
Unlike with personal credit, a business credit rating can vary based upon the agency reporting it since they don’t all use the same scale. Equifax, for instance, will score your business between 101 and 992, based upon your business’s payment history, current debt ratio, and other public records. Meanwhile, Experian uses a 1-100 scale, as does Dun & Bradstreet.
How Can You Build Business Credit?
Building business credit is slightly different than building personal credit. In a business, it’s important that you have solid payment history, but it’s also critical to build credit relationships with vendors and suppliers. Those relationships help establish your credit history, and if you can purchase supplies or inventory on 60-day credit terms, it will help your business grow – and create trade references for your business that will show as positive items on a Dun & Bradstreet report.
You’ll also want to try to keep all debt obligations to the same amount or less than your net income. That means never borrowing more than your income can cover after overhead and expenses. Keeping credit debt low and payments on time will help build a reputation for your business that will let lenders know you’re a low-risk borrower – showing vendors and suppliers that you’re worth doing business with.