Business credit primer

Understand how business credit differs from personal credit.

By William J. Lynott

Business credit works the same way as personal credit in many respects, but there are some important differences. Information about business credit transactions is gathered by the business credit agencies to create a business credit report. Identification includes business name and address, and federal tax identification number (FIN), also known as an employer identification number (EIN), issued by the IRS. The business credit bureaus use this information to generate a report about a company’s business credit transactions. In many cases, companies that issue business credit will rely on the business credit report to determine whether they will grant the applicant credit and how much credit they are willing to give.

An important difference between business and personal credit is that business credit information is sent to the business credit bureaus on a strictly voluntary basis. The credit bureaus may receive little or no information about your credit worthiness no matter how long you’ve been in business and no matter how well you have handled your business credit in the past. So it’s to your advantage to take steps to establish a positive business credit rating.

Establishing a business credit report

It’s easiest and safest to establish a business credit report if your business is structured as a corporation or LLC with an FIN or EIN issued by the IRS. If your business is a sole proprietorship or partnership, your business credit information could be mixed in with personal credit data, muddying up the credit waters. Also, sole proprietors and partners are personally responsible for the debts of the business, putting all personal assets at risk.

Credit scoring models used by the credit bureaus are complex and not revealed to the public. That makes it virtually impossible to know exactly which factors affect credit and to what to degree. The following steps will help you build a positive credit score.

First, register your business with the business credit bureaus. The leading business credit bureau is Dun & Bradstreet (D&B). Registration with D&B using your legal business name is free and will provide you with a D-U-N-S® number—a unique nine-digit sequence recognized as a universal standard for identifying and keeping track of more than 100 million businesses in the D&B database.

Once you register, you will probably be solicited to purchase a full credit profile. It isn’t necessary to purchase this profile. Simply registering (at no cost) will enhance the credibility of your business with potential creditors and enable suppliers and lenders to learn about your business. You should also register with the other two major business credit bureaus: Experian Business and Equifax Business.

How to help put credit to work for your business

• Ask any company with which you have a favorable credit history to report their experiences to the business credit bureaus. Remember, there is no requirement for them to do this. Unless you ask, it probably won’t happen.
• Make sure that your business meets all federal, state and industry requirements for conducting business. It’s important to build your business credit under a Tax Identification Number, not your personal Social Security number.
• Make sure that your business has a current business plan. While a business plan isn’t always required in credit situations, having one, along with supporting documents, is one of the best ways to demonstrate a solid management approach.
• Make full use of business credit cards. If you decide to open more than one business credit card, avoid applying for them all at once. It’s best to build up a history with one card before applying for another.
• Avoid large credit card balances. Outstanding balances larger than about 25 percent of your credit limit are a red flag to financial institutions.
• Eliminate pre-approved credit card offers from your mailbox. These packages offer a temptation to identity thieves. Once they get their hands on such a piece of mail, they can complete the offer by listing a different address. Then they will have an account opened in your name without your knowledge. (To opt out of these offers, go to the Consumer Credit Reporting Industry website or call 888-567-8688.)
• Manage your business debt carefully, especially credit card debt. Any failure to make credit card payments on a timely basis will almost certainly be reported to the credit bureaus, resulting in a negative effect on your credit score.

Credit in itself is not harmful. Used skillfully, it can be one of most valuable business tools available.

By William J. Lynott, a business writer based in Rydal, Pa.