While bootstrapping your business and taking on no debt may be ideal, the reality is that most small businesses will borrow at some point to grow their enterprise, or even to get through a tough time. If you are an entrepreneur, the question will probably not be whether you will borrow, but whether you will do it successfully.
Fact #1: Small business credit reports are not always completely separate from personal credit scores.
You may have heard that small business and personal credit are completely separate. They can be. Some of the business credit bureaus, such as D&B and Credit.net, for example, do not collect information on individuals’ personal credit histories, so that information will not become part of the businesses’ credit score. But agencies such as Experian and Equifax also collect and maintain consumer’s personal credit ratings, and they may blend that information with the business’s credit score to produce a combined score for a small business.
You may have also seen marketing hype about how a business credit profile can overcome a bad personal credit file. In most cases, however, it’s important that small businesses have both good business credit, as well as solid personal credit on the part of the owners. This is especially true in the current environment where investors and venture capitalists aren’t handing money out to anyone who can breathe and has a business idea! Even established businesses will find it necessary in some cases to provide the business owner’s personal guarantees on some loans or credit cards.
That means small business owners must be diligent about protecting and maintaining and optimizing their personal as well as business credit ratings.
Fact #2: The Paydex Score isn’t the only score lenders use.
If you have researched business credit programs, you have probably seen them refer to the Paydex Score offered by D&B. While it is true that this is one important industry credit score, it is not the only game in town. In fact, there are lenders that will never use a Paydex score to evaluate your loan. They will rely on other credit reports and scores offered through Experian, Equifax, the Small Business Exchange, and other business credit bureaus. Some lenders report to one bureau, but not to others.
Knowing where you stand with each business credit agency is helpful if you are trying to borrow.
Fact #3: Paying your bills on time is not enough to guarantee strong business credit.
One company came to us after they had created a successful business, with over twenty employees. But they couldn’t get a business loan because they hadn’t taken the time to build a business credit profile and didn’t know where to start.
To build business credit, you must borrow or buy products and services from companies that will report your payments to the major business credit reporting agencies. If your payment history is not reported, it isn’t helping to build your business credit profile.
In addition, however, business owners should make sure they also have strong financial data about their company, for when it becomes necessary to ask a bank or financial institution for a loan. A business plan will also be helpful here.
If you understand what lenders are looking for, and approach a lender with a complete and well thought out proposal, you have a much stronger chance of getting approved.
Fact #4: When it comes to building business credit, you will want to get it right the first time.
Business credit reports are not covered by the federal law that governs personal credit reports. You do not have the same rights when it comes to disputing the accuracy of information in your file. Therefore, you want to make sure you start out on the right foot, or it can be difficult to get corrections or updates made to improve your rating.
And the sooner you start, the better. For example, one bank was recently offering “no documentation” loans to businesses that were at least two years old. A business that had a two-year history, regardless of how successful it was, would likely qualify. And the longer your business has been established, the stronger its chances of approval since so many fail in the first two years.
Even if your business will make no money the first year or two, it helps to set up the proper business structure and take basic steps to ensure your business appears legitimate and stable to the business credit bureaus. That means getting the proper occupational licenses, and a phone number that is listed with directory assistance in the businesses’ name, among other things. Your business will generally need some form of corporate structure to effectively build a business credit rating.
Your business credit plan should be part of your business planning from the beginning.
Garrett Sutton, Esq., author of Own Your own Corporation, The ABC's of Getting Out of Debt, The ABC's of Writing Winning Business Plans and How to Buy and Sell a Business in the Rich Dad's Advisors series, is an attorney with over twenty-five years experience in assisting individuals and business to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.