The Complete Guide to Small Business Credit

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Small businesses require access to cash and long-term capital in the form of credit in order to operate and grow. It is possible to bootstrap your small business using your personal credit when you first start out, but if you build your business credit and business credit score over time, you can access capital at the most advantageous terms. 

Building and managing your small business credit is an ongoing process. It’s imperative to understand the factors that influence your business credit profile and score. This includes understanding which credit bureaus create business credit reports, how to read and dispute your business credit report, and how to improve and manage your credit profile. This guide answers the following questions:

What is Business Credit?

Business credit represents a company’s ability to borrow funds and pay back the debt later. There are various types of business credit, including vendor payables agreements, bank loans, business credit cards, invoice financing, letters of credit, and credit facilities provided by utility and insurance providers.

A business credit “profile” tracks and summarizes your small business payment history, outstanding debt balances, business transactions, and more. Lenders are able to see a snapshot of your business’s financial health and history when they review your business credit history.

Why is Business Credit Important?

The answer is simple: strong business credit improves your access to cash. A NSBA Small Business Access to Capital study found that one in four small businesses do not receive the funds they need due to business credit problems. Your business credit history can help you secure the cash your business needs on the best terms and at the right time (like during a pandemic!).

Your business credit profile determines your chances of securing contracts, financing, supplies, and other money for cash flow. 

Without good credit, you might pay higher insurance premiums, higher financing rates, and be offered smaller loan amounts. It is even possible that you will be unable to conduct critical business activities such as purchasing materials and inventory, obtaining business insurance, securing equipment leases, or taking advantage of growth opportunities.

Related: The Definitive Guide to Small Business Cash Flow

Business Credit vs Personal Credit: What’s the Difference?

Some small business owners—particularly sole proprietors and family business owners—find it easier to use their personal credit to fund their business needs. Some don’t realize the difference between personal credit and business credit. Business credit is different from personal credit in five important ways.

The business and personal credit scoring systems and the factors that influence them are different. A personal credit score ranges from 300 to 850, while a business credit score ranges from 0 to 100, and for some ratings, from 1,000 to 1,610. Businesses have a variety of credit and risk scores, but individuals only have one (FICO). Personal credit scores take into account more factors than business credit scores, and they are more difficult to change.

Credit and tax obligations are tied to your social security number, while those of your business are tied to its employer identification number (EIN). If a sole proprietor wants to establish credit for their business, they will need an EIN. Additionally, the IRS has strict rules regarding the mixing of personal and business expenses. If you use your personal finances to fund your business, you could make tax reporting and payment errors, and you could incur accounting-related expenses.

Even though a business owner may feel that they ARE the business, they need to build business credibility apart from personal credibility. It is more professional and credible to transact with vendors, customers, and lenders using business credit rather than personal credit.

The Federal Fair Credit Reporting Act gives consumers the right to dispute any inaccurate information on their credit report. Business owners are not protected by this law. In the case of inaccurate business credit reports, it may be more difficult to correct them since credit agencies and creditors are not legally required to do so.

Business credit scores and profiles are publicly available while access to personal credit scores is restricted under federal law to certain permissions.

In some situations, business and personal credit can be linked. The most common example is when you haven’t been in business long enough to establish a solid business credit history. Ideally, you should work to build business credit and keep the two credit profiles as separate as possible. This will offset your personal risk, and it will allow you to build a strong business profile.

What is a Business Credit Score?

Some small business owners may not be aware that their business is being profiled by a credit agency through business credit score. A business credit score indicates the level of risk associated with lending to the business. It changes constantly based on a company’s financial activities.

There are four major companies that assign business credit scores: Experian, Equifax, Dun & Bradstreet, and FICO (Fair Isaac Corporation). Dun and Bradstreet is the most commonly used credit score by lenders, but the Small Business Administration uses FICO’s Small Business Scoring Service (SBSS) to assess lending risks. Since different lenders and vendors use different agency scores, you should know your business credit score and how it is calculated for each agency.

Credit bureaus use a variety of data reported by financial institutions and other creditors to calculate a business credit score. They each have a proprietary method. Your business credit score can be impacted by how much credit you have used and how often. The length of time you’ve had credit facilities also plays a role. And of course, delinquent payments can damage your score. Some factors that influence your score include:

  • Use of credit over time
  • Outstanding debt balances
  • Trends in borrowing and payment behavior
  • Industry and demographic information
  • Duration of trade activity
  • Number and type of credit inquiries
  • Liens or bankruptcies
  • Other public information (IRS, business size, etc.)

What is a good business credit score? The Federal Reserve determined the following credit risk tiers for small businesses in its 2020 Small Business Credit Survey.

Business Credit Risk LevelBusiness Credit Score% of Small Businesses Surveyed
Low 80-10065%
Medium50-7928%
High0-498%

Each credit bureau has its own scoring system and some have multiple types of credit scores, however, so it’s important to understand and monitor what tier your business falls into.

How Can You Get Your Small Business Credit Report

Your business credit report shows you your credit score and most importantly, what factors impact it. Some free sources of business credit information exist, like Nav and D&B’s CreditSignal, but they do not provide a complete picture of your credit history. If your application for business financing is denied, you do have the right to request a free business credit report from each of the credit bureaus within 90 days of receiving the denial letter. 

You can also purchase a copy of your credit report once, or subscribe to a service such as D&B’s CreditBuilder Plus. Below is a breakdown of each credit agency’s scoring system and options for purchasing a business credit report.

Dun and Bradstreet

Credit and Risk ScoresScore Range
D&B rating1-4
D&B PAYDEX Score 1-100
Composite Risk Score1000-1610
D&B Viability Rating1-9
Delinquency Predictor Score101-670
D&B Maximum Credit Recommendation$ amount

Dun and Bradstreet offers different reports and services. Its Credit Signal Alerts are free. Credit Monitor costs $39/month. Credit Builder Plus costs $149/month.

Experian

Credit and Risk ScoresScore Range
Intelliscore Plus                                       1-100

Experian charges $39.95 for a one-time credit report. Its monitoring and credit building products range from $49.95/month to $125/month. They also offer an annual subscription for unlimited monitoring.

Equifax

Credit and Risk ScoresScore Range
Business Credit Risk Score                      101-992
Business Failure Score1000-1610

Equifax charges $99.95 for one credit report and $399.95 for five credit reports.

FICO Small Business Scoring Service

Credit and Risk ScoresScore Range
SBSS Score                                            0-300

FICO SBSS will help you monitor credit. Depending on which service you purchase your credit score from, you can expect to pay in the ballpark of $50/month for this service.

How to Read a Business Credit Report

A business credit report details the financial credit health of a company. Each credit bureau’s report will look different, but all of them will contain a credit score and info on your credit history. As you can see above, some reports include a score predicting future default risk. You should know how to read your business credit report as they are notorious for being inaccurate or missing information.

The following items should appear on any business credit report you purchase:

      1.  A business profile and background including basic information such as the SIC (industry) code, legal name and form, address, employee count, and other legal and incorporation information.
      2.  Financial information about the company.
      3.  A tradeline history section that includes information reported by a business’ creditors, such as payments to financial institutions, lessors, vendors, and insurance companies, their terms, balances, limits, and any delinquencies or late payments.
      4.  Legal filings, bankruptcies, liens, and collections.
      5.  Business credit score(s)
      6.  Uniform Commercial Code filing

A sample business credit report from Experian can be viewed here.

How to Dispute a Business Credit Report

Consumer law requires credit issuers to disclose the data they used to deny your loan. This is not a requirement for business lending. It is your responsibility to investigate and possibly dispute inaccurate credit information.

What are the steps for disputing a credit report? First, obtain and review your company’s credit report from each agency. If you find an error in debt reporting, contact the creditor who reported it and ask them to verify the information.

When your creditor responds, make sure they indicate in writing when they will correct the damaging information.

If the creditor does not respond within 30 days, contact the appropriate credit agency and follow its specific dispute procedures.

You can dispute a report from Experian here and view their policies and procedures.

Dun & Bradstreet asks that you call customer service at: 1-800-234-3867

It’s important to remember that credit agencies will accept what a vendor or institution reports unless you are proactive about monitoring your credit report. If you find a discrepancy with one agency, check with the others to ensure that the same misinformation isn’t being reported.

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How Can You Build Your Small Business Credit?

Building credit is an inexact science because not all of your eligible payments and transactions will be reported. Creditors might only report to one of the credit agencies. Some might only disclose negative information, or may simply not disclose anything at all about their dealings with your company.

You can have a well established business that has worked with lenders for years, but never establish a credit history. So how do you go about building and improving your business credit? The key is to flood your profile with positive activity so that anything that is reported will help you. We’ve provided below several ways to build business credit and ways to avoid a negative impact on your credit.

10 Ways to Build Business Credit

Open a business credit file with Experian and Equifax. Apply for a DUNS number from Dun & Bradstreet.

If you fund your business through personal accounts, your business will have no credit record.

You can submit business payment history information such as utility, insurance, and rent payments through third-party services and can self-report through D&B CreditBuilder and Experian’s Business Credit Advantage service.

Paying lenders and creditors on time is critical to establishing a good credit score.

As with paying on time, regular payments on your business credit accounts are critical in the eyes of lenders.

Make sure to choose vendors that are willing to report to the credit bureaus. Start with a small credit amount and a shorter payment window. Over time ask for increases. Just one or two positive trade references can positively impact your credit score.

You can do this through your bank, or if you don’t have established business credit you can look for a microloan from any number of online business loan providers.

Related: 16 Ways to Finance Your Small Business

Regularly checking your business credit profile and accuracy will make it much easier to apply for loans and credit facilities when you need them. The money paid for subscribing to one of the credit monitoring and credit building services will be more than paid back by avoiding the loss of credit facilities when your business most needs them.

For certain small businesses and credit facilities—such as credit cards or leases—lenders can ask for a personal guarantee or personal credit history to determine risk.

Industries such as restaurants, real estate, and transportation are considered riskier by lenders. Understanding your industry risk can help you formulate a plan to counteract perceived risk, for example by better managing your payables and demonstrating consistent positive trade dealings.

8 Pitfalls that can Damage Your Small Business Credit

Continuously maxing out of your lines of credit demonstrates that you are relying on the overdraft or expensive credit cards for cash flow.

If you apply for many credit cards and facilities over a short period it can make you look desperate for credit and cash and negatively impact your credit rating.

Mixing your personal and business finances and accounts exposes you to several risks, such as tax and accounting errors, reputation risk, and personal finance risk.

Even if you think an error on your business credit report is minor, an incorrect age or industry code will mean that your business is viewed as riskier than it actually is.

It’s not optimal to avoid credit altogether because establishing a strong credit profile relies on demonstrating that you know how to use credit effectively and can make timely payments. Lenders may become wary of you if you avoid credit for a long period of time.

Most creditors will send you several warnings before reporting negative information to a credit agency. Don’t avoid these because most creditors don’t want to report negative information and would rather work out a payment plan or find another solution.

Don’t close your old credit cards or lines of credit you don’t use. This could reduce the your credit score, especially if your old credit cards have a good payment history.

Not only does filing late returns make it more difficult to access credit at the exact time you need it if your most recent return has not been filed, but it also shows lax financial management.

The Last Word on Small Business Credit

If you’ve been bootstrapping your small business with personal credit, it’s time to begin establishing business credit. If you have not been monitoring and your business credit score and profile, now is the time.

Purchase a copy of your credit report. Establish your DUNS number. Take steps to improve your business credit profile.

Establishing a business credit history is the key to accessing the cash you need to operate and grow your small business.

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