What Is Business Credit / Commercial Credit?
Business Credit / Commercial Credit is a company’s ability to buy something now and pay for it later. By establishing good business credit, you can more easily borrow money when your business needs it.
Read on to learn how businesses work loans, how to get them, and the benefits your business can enjoy when you build a solid commercial credit rating.
How to Get Business Credit
The formula for achieving solid credit scores for businesses is not difficult to understand. Your company needs to open commercial credit accounts and manage them well. But that puts the cart in front of the proverbial horse, so to speak.
Before attempting to open accounts for your business, make sure your business is properly set up so it can better qualify for funding. The following five tips can help:
Establish your business as a legitimate business entity.
Forming a separate legal entity for your business (such as an LLC or a corporation) can make it easier to create a business loan file and ultimately qualify for corporate finance. It can also offer tax benefits and protect you from some of the personal liability you might have as a sole proprietorship.
1. Register your company.
Depending on where your company is located, you will likely need to register with your foreign minister. In many states, this is part of the incorporation process that you complete when you set up your LLC or business. However, it is a good idea to check with your foreign minister to confirm that you have met all of the necessary business registration requirements.
2. Get an EIN (Employer Identification Number) from the IRS.
An EIN — a social security number for your company. They will use it to identify your business when paying taxes to the IRS. An EIN is also important when completing corporate finance applications such as business credit cards and loans and opening a bank account on your company’s behalf.
3. Open a commercial bank account.
Having a separate commercial bank account can make your business appear more credible in the eyes of lenders. A company’s health is often measured by reviewing cash flow to and from its commercial bank account. A commercial bank account can also help you keep your corporate and personal finances separate, avoiding bookkeeping problems and tax time challenges.
4. Get a dedicated business phone number.
There is no need to sign up for expensive phone service or invest in an expensive VIP phone system when your business doesn’t need it. However, a dedicated phone number for your business is a must if you want to appear credible to lenders and service providers (not to mention your customers). Remember, your work phone number will also be listed in your local directory.
Types of Business Credit
Once you’ve got your business on the map by following the four steps below, it’s time to start thinking about which accounts to open to create your business credit profile. As a startup, you also have options.
Here’s a look at the four main types of business loans your company can obtain.
1. Installment accounts
Commercial installment accounts are business loans where you borrow a fixed amount of money. You pay the lender back a fixed amount over a set period of time. Are you paying attention to the trend? Your interest rate is also fixed and doesn’t change from month to month.
2. Revolving Accounts
The two main types of revolving credit that you can get for your business are lines of credit and small business credit cards. Revolving credit allows you to borrow money up to a preset credit limit. Once you’ve paid off your balance, you can top up your credit limit as long as the account remains in good condition.
With a credit card, your company doesn’t have to pay back the full amount that was charged in a given month. Rather, only a minimum payment is due. However, it is advisable to pay off your full balance every month, even if it is not required. That way, you can avoid expensive interest fees and keep your credit utilization low. Some business credit scoring models reward you for the low utilization of your credit cards.
3. Load cards
Debit cards like American Express look like credit cards from the outside. But these pieces of plastic work very differently than the credit cards you may be used to. With a charge card, your business will typically have to pay the full amount you charge each month, rather than just a minimum payment like that required with a credit card.
4. Supplier accounts
Vendor accounts, sometimes called Net-30 accounts, allow your company to pay for products and services after they are purchased. You can buy now and pay later, usually within 30 days. Instead, however, certain companies may offer Net-90, Net-60, and even Net-15 conditions.
A provider account can help you increase your cash flow. It can also add a positive trading line to your business credit report, provided the seller signs up with a business credit bureau.
Business Credit Reporting Agencies
Many types of business loans require you to sign a personal guarantee to open an account. A personal guarantee makes you a signatory to your business card or small business loan. If your company does not repay its debts as agreed, you are- agreeing to be personally liable.
Good personal credit can be beneficial and help you qualify for a business loan. However, you should not sign a personal guarantee without understanding the risks. You will be putting your personal finances and credit at risk if your business cannot keep up with its payments.
Business credit bureaus
You’ve probably heard of the three major consumer credit bureaus — Equifax, Trans Union, and Experian. But did you know that there are also three major business credit bureaus?
• Dun & Bradstreet
• Experian Business
• Equifax Business
Just as consumer credit bureaus collect data about you personally, business credit bureaus collect data about your company and how it manages its credit obligations.
Open Business Credit That Reports
When you open a business account, the creditor or seller must report your account activity to a business credit reporting agency before the account can assist you with borrowing.
Need help finding accounts to report to business credit bureaus? The Business Launcher tool in your free Nav account can show you companies that are generating reports.
How to Add Information to a Business Report
The business credit bureaus use information submitted by creditors and vendors (also known as data providers) to create credit files for businesses. Once you have a business credit file with a commercial credit bureau, a business credit report can be created about your company and sold to others who want to review it.
Of course, a seller or lender may want to access your business credit report when applying for business finance. However, there are other reasons a company might want to review your business balance as well.
For example, insurance companies can check your business balance when you apply for a new policy. The conditions on your business card can affect your security. Companies considering working with your company may also review your trade credits to assess the health of your business. You can also find information about your company through the Small Business Financial Exchange.
No Right to Privacy
Anybody can overview your small business credit score reviews for any reason. There is no privacy claim when it comes to corporate credit reports. The business credit bureaus can sell your credit information to anyone they want.
This is another reason why adding to your to-do list is an important task to build and maintain strong business credit.
Business FICO Score
Your company has not just one but many credit scores. You are probably familiar with FICO scores from personal lending. If you’ve ever bought a home, financed a vehicle, or opened a credit card account, there’s a good chance your lender checked your personal FICO score as part of the application process.
FICO is dominant in the personal credit scores market. 90% of top lenders use FICO scores when making consumer credit decisions. However, FICO scores are also very relevant in the business credit scores market.
The FICO SBSS Score
The FICO Liquid Credit Small Business Scoring Service, also known as FICO SBSS, is a popular credit score used by lenders and financial institutions to predict risk when businesses apply for funding. The FICO SBSS score, with a range from 0 to 300, is a hybrid score that takes both business and personal loans into account. The higher your score, the more likely you are to make timely payments to a business lender.
If you want to get a decent FICO SBSS score (and you should because lenders use it a lot), you need to focus on maintaining healthy credit reports — both business and personal. On-time payment history, low credit card credit usage, and longer credit history are all factors that can potentially improve your FICO SBSS score. You can also check your FICO SBSS score using Nav’s Business Loan Builder plan.
All Business Credit Scores Matter
Lenders who provide Small Business Administration (SBA) loans commonly use FICO SBSS scores. Typically, when your business applies for an SBA loan, your FICO SBSS score must be 140 or higher (often 160+) to be eligible for funding.
FICO SBSS is a popular credit score used by more than 7,500 lenders in the United States. However, it’s not the only business credit score that you need to monitor.
Different commercial lenders use different credit scores. Hence, you should- keep an eye on your business credit reports and other factors that can affect your many different business credit values.
You have no control over which credit a lender uses to check your application. But first, you can find out what factors are affecting your corporate credit values. When you understand the factors that affect your scores, such as: For example, payment history, and credit usage, you can work towards producing business credit reports that perform well under the control of multiple business credit rating models.
Benefits of Business Credit
Good business credit can pay off in some ways. Here are five great benefits your business can potentially enjoy as you strive to build your business credit.
1. Qualify for funding. A Nav survey shows that 20% of small business owners have been turned down for corporate finance in the past five years. While credit isn’t the only factor that lenders consider, good business credit ratings can improve your chances of approval the next time you fill out a business loan application.
2. Save money. A good business loan can result in lower insurance premiums, better rates and fees, and lower deposits when you get a new lease or service for your business. Solid business loans can also help you get better trading terms from suppliers. The opposite is true for bad credit scores.
3. Keep your personal and business finances separate. Separating your credit can protect your personal credit reports and simplify bookkeeping.
4. Buy better options for business credit cards and loans. If your business credit is in great shape, you can probably afford to check out the best rates and deals that various lenders have to offer.
5. Increase the value of your company. If you ever hope to sell your business or attract investors in the future, a strong business credit profile can be a powerful selling point.
Are you ready to see where your business loan is? Register for a free Nav account to check your business and personal balances side by side.
If this is your first time learning about business loans and how they work, it seems like you still have a long way to go. But 45% of business owners don’t even know they have a business credit rating at all. If you take steps to educate yourself about business loans, you might be miles ahead of the competition.