For many small to medium sized businesses, a credit score can make all the difference in obtaining a line of credit for expansions or even obtaining a credit card processing account. While most business owners use their personal credit scores to validate their business’ credibility, business credit scores have been available through services like Dun & Bradstreet (DNB) and Experian (EXPGF) for several years; although most business owners are unclear how to develop these scores. Beginning January 2014, FICO (Fair, Isaac & Company) has also made business credit scores available to business owners, when they were only previously available to lenders.
With an abundance of resources available for people to learn how to successfully manage personal credit scores, there seems to be a shortage of resources available on successfully managing business credit scores. The best resource we found, from the Small Business Administration (SBA), not only explains why it’s important to develop a credit score for your business, but also offers insight in to how to build these scores and maintain them.
Why Businesses Should Manage Their Business Credit (source SBA.gov)
A personal or business credit score can be the determining factor in being approved for a credit card processing account, and may affect fees and terms. The SBA offers additional input on the importance of managing business credit.
- Securing more financing at better terms. Good credit can ensure that small businesses get financing when they need it. According to the SBA, insufficient or delayed financing is the second most common reason for business failure. And, since most loan decisions below $100k are automated, the business credit file will often dictate the amount and terms of a loan. For businesses with poor credit ratings, top national banks may increase credit card interest rates on average from 9% to 18% and loan interest rates on average from 8% to 12%.
- Ensuring you get needed supplies at affordable terms. Suppliers evaluate your credit and make decisions about how much credit to extend to you – perhaps a $30K credit line could have been $60K with a stronger business credit file. Good business credit can ensure that you get the supplies you need under the best possible terms, freeing up more money for your business.
- Protecting yourself against business identity theft. Actively managing your business credit file helps you ensure that fraudulent or incorrect information is not in the file. 15-30% of all commercial credit losses are due to fraudulent activity. It’s important that your business credit file truly reflects how good your credit is, and that you are aware of any inaccuracies and missing data so you can address them promptly.
5 Steps to Managing Business Credit (source sba.gov)
1. Determine whether or not you already have a business credit file. Small business owners should first know if they have a business credit file with D&B. You can find this out by calling D&B Customer Service at 1-866-785-0430 or visiting https://iupdate.dnb.com/iUpdate/mainlaunchpage.htm.
If you don’t have a business credit file, establish one by applying for a D-U-N-S® number. Small businesses should apply for a D-U-N-S® number, a unique business identification number, as soon as they start their enterprise to start the process of creating a business credit file.
If, when you call or visit the D&B web site, you determine that you already have a business credit file, review it completely to understand what information it contains. Add or modify the information as necessary to ensure that those looking at your business credit (such as vendors, suppliers and financial institutions) are making decisions based on complete and accurate information.
2. Establish a business credit history. When they are starting up, many small businesses use their personal credit and finances to get their business going. But they should establish a credit history by putting expenses (such as a business phone line) in their business name and using a commercial bank account to pay their bills.
3. Pay bills on time – and understand other factors that influence your credit rating. In order to improve your commercial credit scores and build a positive payment history, the most important thing to do is pay your bills on time. Be very careful not to overextend your business, and use any line of credit judiciously. While payment behavior is important, credit ratings are based on multiple factors. D&B, for example, maintains 150 factors that go into a credit rating, such as industry, revenues and number of employees.
4. Monitor your business credit file and keep it up to date. According to D&B, the credit score of about one in three businesses declines over just a three-month period. By monitoring your business credit file, you will be aware of any change in your ratings before it affects your relationships with customers, suppliers and financial institutions. You should keep your credit file current and accurate, reflecting changes such as location, number of employees, outstanding suits/liens and revenue – all of which impact your credit rating
5. Monitor your customers’ and vendors’ credit. Monitoring credit reports that provide a clear and complete picture of the credit standing of your customers can help you to determine how much credit, and on what terms, you should extend
FICO’s new service, through Creditera provides a business credit score monitoring service which allows business owners to manage their FICO and Experian credit scores for a $49.99 monthly fee. However, credit expert for CreditSesame.com , John Ulzheimer, advises in a recent A CNN Money article that although, “FICO’s scores have a solid reputation with banks and credit unions… Dun & Bradstreet’s (DNB) Paydex score is more widely used for small business lending.”
About the Author
Rachida Essadiq, Director of Marketing at NTC Texas is a successful five year marketing veteran, running events and campaigns for large to small enterprises and non-profits. She specializes in blogging, social media, branding/ identity and search engine optimization, striving to provide NTC Texas customers and fans with entertaining and valuable educational resources to find success in all areas of their businesses.