Understanding Business Credit
Every once in a while there’s a debate on how businesses are viewed as similar to individuals. This business individuality is called “corporate personhood” which basically gives companies legal rights, responsibilities and abilities very similar to an individual citizen. Interestingly enough, a business actually has its own credit score, completely separate from any of the owners or principles of the company. Many people, even business owners don’t even have a clue that something like this exists, but it does, and in many cases it’s a very important part of the business profile. Just like a personal credit score reflects the ability (or inability) to meet financial obligations, the business credit score measures the creditworthiness of the business and the ability that the business has paying back debts. The higher the score, the more credible the business is and the more likely the business will be approved when seeking funding, real-estate or anything that would typically require a credit pull on the personal side.
Now, understanding credit in general is not as easy as people may think. Of course if you want good credit, pay your bills and pay them on time, all the time. But there are ways, with a little effort, that make a credit score not just good, but great. First, business credit scores are not on the same scale as personal credit scores. When you think of a personal credit score you think of a good score being in the 700s, and an excellent score being closer to 800. The personal credit score is expressed in a range from 350-850.
Business credit scores on a scale of 1 to 100. Most financial institutions consider any business credit score above 80 to be excellent. I consider it to be comparable to the 700 range on the personal side, which opens up the ability to acquire the best rates and terms the financial industry offers. And the goal here is to build the company to a position where it’s not relying on the personal credit profile to function and operate. The company should eventually become self sufficient, which releases liability on the business owner personally if something were to go wrong. The two scores are completely separate and the personal score has no impact on the business credit score, which is the same the other way around in most cases. It’s very important to protect the business credit by monitoring and evaluating it often just as a business owner would protect any other business asset.
Another noteworthy fact that should motivate a business owner to protect their business credit is the fact that business credit scores are public information, available for anyone, including competitors to view. All they need is the legal business name and FEIN (Federal Employer Identification Number) and they can then view the business credit report. This is especially important if the business is partnering up with another business or adding a vendor to the supply chain. If the business is considering to engage in any sort of business with another company, wouldn’t it be beneficial to know what that business’s credit looks like before making that big decision? Well that option is available, and to them as well, so take advantage of it!
Business owners should make sure they know their accounts are being reported, and to whom. First step is making sure the business is registered with the appropriate business credit bureaus with their EIN (Employer Identification Number). This is very similar to a SSN (Social Security Number) for the business and should have been issued by the IRS when the company was established. It’s the first step in separating personal and business. Next, the business should be registered with the 3 major bureaus:
For example, with Dun & Bradstreet, which is considered the world’s leading source of commercial information and insight on businesses for over 150 years, a business needs at least three trade lines for a business credit score measuring payment history. Even if the business doesn’t work with a lot of suppliers, it should at least set up trade lines with anything possible, such as the water or office supplies distributor. If those vendors don’t report to a credit bureau, a business can list them as trade references on the D&B account, and Dun & Bradstreet will follow up to collect that trade data. When a business owner is looking for business financing, a few extra steps and questions should be asked; “is this going to report to my business credit?” It takes a little effort, but that’s what running a business efficiently is all about, effort and that extra mile. It’s the little things that can make a big difference in your business. Business credit awareness is vital to the growth and prosperity of business.
