As a busy entrepreneur, it probably feels a bit daunting to research, learn, and understand your business credit reports. Doing so can feel like a part-time job when you’re stretched thin, but don’t let that dissuade you. Your business is 41% more likely to qualify for funding if you know what’s in your company’s credit reports and understand the information, according to a Nav study.
In the Real World
My colleague, Janet Ashforth, learned this the hard way with her former home-based business, Habitats Tiny Homes LLC. Ashforth said when she launched her company, she applied for a D-U-N-S number so that she would have a Dun & Bradstreet report. “I didn’t understand at the time that the D&B Paydex score was mostly payment based. And to have a score above 80, I needed to pay my accounts early, not just on time.” She also didn’t realize that some of her other business credit scores were a blend of her business and consumer credit.
Habitats Tiny Homes ran into trouble when a client refused to reimburse the company for the $30,000 it spent on her custom tiny home. “It was all the cash we had,” says Ashforth. Her company was in immediate danger of closing its doors. She had to scramble to try and find a financing source. Unfortunately, Habitats Tiny Homes’ business credit scores were all over the map.
“I didn’t understand or know what was in my reports when I applied for financing. And since it was an emergency, I was rushed.” Ultimately, Ashforth had to close Habitats’ doors. Closing involved firing her two grown sons and her lead carpenter who supported a family of six.
“It was gut-wrenching,” Ashforth says. “I was out of a job. My boys were out of a job, and so was my lead carpenter. Many of my clients lost significant amounts of money. I lost all of my time and financial investments in the company.” A year later, the client who caused the trouble sued her for the uncompleted project.
So maybe you’re now convinced that checking and building strong business credit is crucial. When you do, you might be in for a few surprises:
1. Many Creditors Don’t Report
With personal credit, more often than not, your loans, credit cards, and other obligations report to all the major credit bureaus. That’s not the case with business credit. Commercial credit bureaus may never receive any information about your credit transactions. Many of your accounts may not show up at all. Additionally, each business credit bureau could potentially receive different information about your accounts.
You could go for years paying loans, leases, and vendors on time, and none of it could get reported to the bureaus. So you want to ensure that you do business with creditors, vendors, and lenders who will report your transactions.
2. Scores May Vary
The best company to check credit score is not set in stone. If you check your personal credit scores through different services, you’ve no doubt seen they’re not the same. But that’s usually because those sites are using different credit scoring models. It’s unusual to have a high personal credit score through one bureau and a terrible one through another.
Your business credit score is different. You may see significant differences between your scores when you check them through Dun & Bradstreet, Equifax, and Experian. They each use different credit scoring models, and the factors and data they use to generate those scores can be quite different.
When viewing your business credit reports, remember that each bureau collects and verifies information and scores differently. Bureaus typically collect payment information from sources such as vendors, banks, data-gathering trade associations, and business credit card issuers.
3. Creditors Aren’t Named
Most commercial credit-report services keep the names of your suppliers, vendors, and other lenders private. That’s why you won’t see your creditors’ names disclosed on your business credit reports. Unfortunately, it’s more challenging to determine if there are errors on your file if you aren’t sure which creditors are reporting.
Instead, each account will be assigned a category such as “bankcard” or “food services.” You’ll have to review the data about each account to determine which is which. If you can’t figure that out, it can be challenging to identify discrepancies. An SBA survey found that 23% of small business owners had difficulty disputing or correcting a mistake with a debt collector or credit-reporting firm.
4. Payment History Differs
When you read your business credit reports, one of the things you won’t necessarily see is a breakdown of your payment history by month. (Equifax’s business credit report provides some of this data, though other reports do not.) Instead, there’s often just a summary that reflects a percentage of on-time payments you’ve made, as well as a summary of the percentage of payments that have been late. On-time payments will ensure your business credit scores remain high.
You may also notice that your payment history percentages differ from bureau to bureau. This is can be the result of the fact that your creditors aren’t required to report at all. A late payment may appear on one report and not another.
Finally, there’s one big difference between business and personal credit when it comes to late payments. With business credit, miss a payment by a day and your late payment may be reported. Instead of the 30-day buckets used with personal credit reports, business credit uses something called “Days Beyond Terms.” If you have net-30 payment terms (which means your payment is due in 30 days), and you pay on day 32, you are 2 DBT. Pay on day 34 and you are 4 DBT.
Fix Errors Early and Often
Mistakes are more common with business credit than personal credit. A low business credit score could prompt lenders to reject your financing application. Or, mistakes could force you to pay your suppliers cash on delivery or cause you to pay higher insurance rates.
It’s not uncommon for two companies’ profiles to get mismatched. If the name of your business is similar to other businesses — even in a different state — your credit files could get mixed up with one another. Credit files of franchises that all share a similar DBA (“doing business as”) can easily get mingled.
The best strategy is to check your reports for missing or inaccurate data often. Doing so can feel like a part-time job, so you may want to sign up with a business credit monitoring service to take the responsibility off your already overloaded plate. Also, immediately report errors to the bureaus. Some services will even facilitate the dispute process for you.
Don’t overlook small mistakes! Something as simple as an incorrect SIC code (used to classify your business industry type) can lower your credit scores or block you from some financing options entirely.
Consider continual monitoring; you’ll receive alerts in real time if anything changes on your reports. That way, you’ll avoid any negative surprises down the road, and you can start the dispute process sooner.
Steps You Can Take to Build Business Credit
When you launch your venture, start early to develop and manage your credit profile to give your company the best approval odds. If you’re still operating as a sole proprietor, consider incorporating. You can build business credit as a sole proprietor but you can’t avoid borrowing in your personal name until you have a legal business structure.
1. Create a Business Identity
Your company has a higher chance of qualifying for credit if you establish a business entity that’s separate from your identity. Your ultimate goal is to build a business credit profile that gets you approved for financing in the name of your business, and better yet, without having to provide a personal guarantee. The following steps will ensure that you have a legal identity for your firm.
- Create a separate legal business entity, like an S-Corp, C-Corp, or LLC.
- Get an Employer Identification Number (EIN) from the IRS.
- Open a bank account in the legal name of your business.
- Apply for a Dun & Bradstreet D-U-N-S number.
2. Apply for Business Credit Cards
A credit card in your company name is an essential step to building your business credit. All the major business credit card issuers report to at least one of the major commercial credit reporting agencies. Use your credit card strategically to buy things your company needs daily. Then, try to pay the balance every month in full to avoid interest charges.
3. Establish Trade Credit
A trade account comes into play when vendors and suppliers allow you to buy goods and services and pay for them later. Office supplies, cleaning supplies, coffee, and snacks are just a few examples of things you can purchase for your business via vendors.
Trade accounts are one of the fastest and simplest ways to build your credit profile. Remember, not all suppliers report to businesses credit bureaus. Verify the suppliers you choose do report to the major commercial credit agencies. You’ll also find a list of vendors that report at Nav.com/vendors. And, of course, make sure you pay them on time.
4. Acquire a Small Business Loan
Having a home-based business shouldn’t stop you from getting a small business loan. Some lenders may want to verify the address makes sense for the type of business you run, but it shouldn’t be a disqualifier. You’ll need a high consumer credit score, and banks or credit unions will likely also require a solid business plan.
If your business is new and doesn’t yet qualify for a loan on its own, you may be able to receive a small loan based on your consumer credit score. Look for non-profit organizations that offer startup loans. Accion and Kiva are two non-profit organizations dedicated to providing economic opportunity to all.
Many small business loans report to at least one commercial credit reporting agency, but be sure to ask. Ideally, you want your payments reported so you can build credit.
