Why Is Business Credit Important? (Beginners Guide)

a stack of business credit report papers

All business owners strive for success; to achieve it, they require a strong foundation and trustworthy resources. Business credit is one of the essential resources that can significantly contribute to a company’s financial stability and growth. But first, you must understand what exactly business credit entails.

What Is Business Credit?

Business credit is determined by a company’s capacity to borrow funds and pay them back within set timelines. It is similar to personal credit, but it is based on the business’s financial history rather than the owner’s personal credit history. Business credit scores typically range from 1 to 100, with higher scores leading to better rates and terms.

How Does Business Credit Work?

A business credit score summarizes a company’s financial activity and reputation, much like a personal credit score. This information covers the company’s payment history, outstanding debts, and liens and judgments against the company.

It also includes other financial information that may be deemed necessary, such as how long the company has been in operation, its annual revenue, and the industry it’s in. A key difference between personal and business credit is in how it’s established.

While individuals can start and improve their personal credit scores by paying bills on time or taking out loans, businesses need to take active measures to establish their credit profiles.

The most common way to do that is by getting a company credit card to pay vendors with, then asking those vendors to report you’re positive payment history to one of the major commercial reporting agencies, like Dun & Bradstreet. This helps get a company’s credit off the ground by building an initial credit profile, showing you pay your bills on time and gradually increasing your score.

What Is Considered A Good Business Credit Score?

A company is considered a low-risk borrower with good business credit if it has a:

  • Dun & Bradstreet PAYDEX score of at least 80
  • Experian Intelliscore Plus of at least 76
  • Equifax Payment Index Score of at least 90
  • FICO SBSS score of at least 140

The Benefits Of Having Strong Business Credit

To thrive as a small or medium-sized company, having a strong business credit score is crucial. Achieving and maintaining outstanding credit scores requires commitment and consistency, but it offers numerous benefits that will positively impact your company. Such as:

It’s Easier To Qualify For A Loan

Lenders will evaluate your creditworthiness based on your business credit history. A strong credit score and positive payment history increase the likelihood of your loan being approved. Establishing you as a trustworthy borrower and helping you quickly access the funds you need.

You’ll Get Better Interest Rates

Lenders are more confident lending money to businesses with high credit scores, as it shows a history of timely payments and responsible financial management. This can result in lower interest rates, which ultimately means you’ll pay less over the life of the loan. All these benefits can improve your cash flow, making it much easier to maintain profitability.

It Protects Your Personal Credit

Your personal credit score may be affected by your business’s financial decisions if they are linked together. For instance, if you use your personal credit cards to finance your business or have a personal guarantee on a business loan, any negative activity on the business side will directly impact your credit score. This is why it’s crucial to establish separate business credit.

By building a strong business credit score, lenders and creditors will evaluate your company’s finances independently of your personal financial situation. Further separating your personal finances from your business finances. This is particularly valuable for small business owners who may otherwise risk losing everything to ensure the success of their businesses.

Is Business Credit Different From Personal Credit?

It’s important to recognize that personal credit and business credit are two distinct entities. Personal credit is connected to an individual’s social security number, while business credit is tied to a company’s employer identification number (EIN).

A person’s borrowing, payment history, and current debts are summarized in their personal credit report. Conversely, a business’s payment history and financial health are detailed in its business credit report.

One notable difference between personal and business credit is that business credit has no maximum score limit. While personal FICO scores are capped at 850 points, businesses can achieve scores well beyond 900 points. This enables companies to establish credibility with lenders and vendors by achieving higher scores than individuals could ever attain.

Another important distinction is that the three major consumer reporting agencies (TransUnion, Experian, and Equifax) are required by federal law to provide individual consumers with one free copy of their report each year upon request. However, commercial agencies like Dun & Bradstreet or Experian aren’t required to provide free business reports. 

When entrepreneurs apply for a business loan or line of credit, it’s crucial to understand that it can affect personal finances if they use their own assets as collateral or personally guarantee the debt. On the other hand, if a company has established strong business credit, it may be able to secure financing on its own without requiring an owner’s personal guarantee or putting any assets at risk.

By building strong business credit separate from personal finances, entrepreneurs can safeguard themselves in case of default or bankruptcy.

Suppliers May Give You Better Terms

A strong business credit score can be highly beneficial for your company, particularly when working with suppliers. Suppliers are more likely to offer better terms and pricing if they see that your business has a good payment history and is financially stable. For instance, imagine that you need to order significant inventory for your retail store.

If you have a high business credit score, you might be able to negotiate longer payment terms with your supplier, which would give you more time to sell the inventory before you need to pay for it. Furthermore, suppliers may be more willing to extend credit lines or offer discounts if they know that your business has a history of paying its bills on time.

This can significantly enhance your cash flow and overall profitability. You should keep in mind that building strong relationships with suppliers requires time and effort. However, having strong business credit can give you a competitive advantage in these negotiations and help establish trust between you and your suppliers.

How To Improve Your Business Credit Score

Improving your business credit score takes time, but keeping track of it and monitoring your progress is essential. Here are some steps you can take to improve your business credit score:

  1. Pay on time: Paying your bills on time is crucial to maintaining a good business credit score. Late payments can significantly impact your score, so make sure you pay all invoices and bills before their due date.
  2. Maintain low credit utilization: Like personal credit, high balances on your business credit accounts can hurt your score. Keep your credit utilization below 30% by paying off balances quickly.
  3. Regularly check for errors: Mistakes happen, and they can negatively affect your business credit score. Check for errors in reporting periodically and dispute any inaccuracies or errors promptly.
  4. Build strong relationships with suppliers: Suppliers may be willing to offer better payment terms or increase your limits if they trust you, improving your score over time.
  5. Keep old accounts open: Closing older accounts may seem like a good idea, but this can negatively affect your business’s credit score. Keeping older accounts open demonstrates that you have a history of managing debt responsibly.

By following these steps, you’ll be well on the way toward improving your business’s creditworthiness and reaping the numerous benefits a high business credit score provides.

Conclusion: The Reason Business Credit Is So Important

Much like personal credit, business credit is a measure of a company’s financial credibility and ability to repay borrowed funds. However, unlike personal credit, establishing a solid business credit score requires proactive steps such as obtaining a company credit card and having positive payment histories reported to commercial reporting agencies like Dun & Bradstreet.

Maintaining good business credit can bring numerous benefits, such as easier loan qualifications, lower interest rates, and reduced personal credit risks. To build a strong business credit score, paying bills on time, keeping credit utilization low, fostering good relationships with suppliers, and regularly checking for reporting errors are necessary. However, it is equally important to routinely review your own business credit reports and vet potential clients, vendors, or businesses to ensure they will fulfill their obligations. Contact us today to learn more.

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