What Is Business Credit and Why Does It Matter?

Many new entrepreneurs start a business without knowing about one of the most important elements of financing: business credit. Your business' credit rating can have a significant impact on its ability to secure different types of financing and terms with vendors and suppliers, which can influence its growth and overall success.

What Is Business Credit?

Your business has a credit score that's very similar to your personal credit score. Just as your personal credit score reflects your ability to use credit responsibly, so does that of your business. With a good credit score, your business will have access to different types of financing, like business loans and lines of credit. Additionally, a good credit rating will help you score better terms on loans and with some vendors and suppliers.

How Is Business Credit Calculated?

Your business' credit score is computed by measuring its trade experiences with lenders and creditors, including collections information, payment habits, debt ratio, and outstanding balances. Other considerations include information gathered from public records such as how long the company has been in business, if it's been involved in any legal filings, and how much the business is worth. All this data is intended to help potential lenders and creditors assess how risky it is to loan money to your company.

Three agencies, Dun & Bradstreet, Experian, and Equifax, gather information to calculate credit scores for businesses. Scores are given from 0 to 100, with 100 being perfect. A score of 80 or higher is generally considered good.

How Can I Ensure My Business Has a Good Credit Score?

There are a few things you can do to help build your business' credit score. First, as soon as you start the business, take the time to obtain the proper local permits, set up a devoted phone number, open bank accounts in the business' name, and handle other logistical details that will prove the business exists on paper. This will start to build a history for your business, which is an important variable in credit scoring.

Whenever possible, seek out credit for the business. This can be paying vendors and suppliers on terms or simply opening a credit card account in the business' name. Once you have that credit, make sure you pay on time. If possible, pay early. In order to achieve a perfect score, you need to demonstrate early payment to creditors. Don't take on too much debt and only use a manageable percentage of the credit that's offered to you.

Get in the habit of occasionally requesting a copy of your business' credit report from each of the three credit reporting agencies. It's important to keep an eye on your score to make sure all of the information they have is accurate. If you see any errors, request a correction. Some businesses find it convenient to subscribe to a service that will regularly monitor all of the business' credit reports for a fee.

When it comes to building credit for your business, knowledge is power! With a strong history of responsible credit usage, your business will have access to the best terms and financing options out there, helping you grow and thrive.

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