Credit can be your best friend -- or your worst enemy. For small business owners in particular, ensuring strong business credit is crucial to sustaining, and often growing, your company.
Having an exceptional business credit score can lead to better loan rates, lower fees, and boosted confidence in your small business. A poor credit score, on the other hand, could cost you relationships with vendors or prevent you from partnering with large companies or government agencies. Have you ever wondered why you lost a bid on a big contract you through you could land? A bad business credit score could be holding you back -- and you might not know it.
Because there's so little knowledge around small business credit, many small business owners do not realize they have bad credit or even no credit at all -- a pitfall that can actively impede growth. My company, Manta, conducted a 2016 survey with Nav and found that small business owners are struggling when it comes to understanding business credit.
Since strong credit is key to qualifying for loans and maintaining business partnerships, it is essential for small business owners to understand the path to establishing good credit. Here are a few tips and tricks that small business owners can adopt to learn more about credit building.
Business Owners Don't Know What They Don't Know
In oursurvey, 72 percent of small business owners said they don't know their business credit score. With so many owners admittedly lacking crucial information about their companies, the first step for taking control is to research your score and how it affects you.
First, look up your personal credit history; once you have done so, check your business credit score. Though these scores are different, they can impact each other, so it is essential to be aware of both. A high business credit score indicates to prospective lenders and vendors that your company is reliable and can be trusted to repay loans.
To protect themselves, prospective lenders will require a high business credit score before approving a loan. A high credit score is important for small businesses to work with lenders, but it is also an important aspect of a company's reputation.
Vendors and suppliers will often check a small business' credit score as a part of the vetting process, before issuing you trade credit or even deciding whether to do business with you. Good credit can earn small businesses profitable new deals with larger companies, including enterprise-level relationships, while a poor business credit score could prevent you from bidding on government contracts.
How to Build a Strong Business Credit Score
The easiest way to build business credit is to sign up for a business credit card. This is a separate line of credit from a personal credit card -- and it should not be used for personal expenses. Because this credit card is attached to your business credit, only use this card to purchase business essentials and make sure you pay the full amount, on time, every month.
Another option is to establish accounts with suppliers that offer "trade credit." Trade credit allows business owners to buy items and pay for them later, usually on net-30 terms, which means the invoice must be paid in 30 days. Whenever you take delivery of materials or equipment without paying for them immediately, you're leveraging trade credit.
Another step to building good credit is growing your credit references. A credit reference is any company or organization that regularly reports your borrowing and payment activities to commercial credit agencies like the Small Business Financial Exchange (SBFE), Experian, Dun & Bradstreet, or Paynet. If a vendor has extended you trade credit, for instance, make sure they're reporting your payment history to these agencies.
Lastly, all companies should have a DUNS® number from Dun & Bradstreet. Dun & Bradstreet is a major commercial credit reporting agency that tracks and keeps records of business credit reports. To increase the odds of firms lending you money, you should have a DUNS® number, which can be obtained by submitting an online form with your company's information.
Pay Early and Check Often to Maintain Great Credit
Building solid business credit is only half the battle -- you also need to keep it up. Maintaining good credit means ensuring all credit cards and other credit-building accounts are paid on time. Check your automated payment settings monthly to make sure nothing has changed and all your information is up to date.
Early payment is always a great option to earn higher credit scores and gain trust from the lending agency you are working with. If an account is payable net-30 but has an early payment option, I recommend taking advantage of this. Paying early can boost a business credit score. This is different from personal credit, which is not impacted by early payments.
Maintaining credit also means keeping your personal credit score in check, so make sure your personal accounts are paid monthly and on time. Once you know your credit scores, both personal and business, make sure to check them often. If one or the other starts to decline, act quickly so lending agencies view your business favorably.
Having a high credit score is extremely important for small business owners Staying aware and engaged with the credit-building process should be a top priority. While it can be a long road, once you understand the basics and have the right processes in place, maintaining strong business credit is much easier.