Understanding and Building Your Business Credit

When we wrote about increasing the value of your business, we compared it to increasing the value of your home. There are also similar parallels when we talk about credit.

If you are thinking about purchasing a home, one of the most common pieces of advice you will hear is to check your credit score in advance, so that you can take steps to improve it if necessary. Business credit is no different. Before you consider selling your business, or purchasing another business, etc. it is important to have a clear understanding of your business credit. Let’s do a quick overview of some key terms:

What is business credit?

Business credit signals your company’s ability to handle its finances, purchasing power, and debt. Like personal credit, business credit is something you build over time. It considers several factors and is expressed in the form of a business credit score.

A business credit report is solely for a business and lists all pertinent information, such as company finances, liens, subsidiaries, and vendor payment data. A company’s business credit report is public information and can be accessed by anyone. The three main credit bureaus for business credit reports are Equifax, Experian, and Dun & Bradstreet.

In contrast, a consumer credit report is private and focuses only on an individual’s personal credit. It lists information such as loans, credit cards, delinquent accounts, and any liens. For consumer credit reports, the three main credit bureaus are Equifax, Experian, and TransUnion.

What is debt financing?

If you have a mortgage or a car loan, then you have experience with debt financing. Debt financing comes from a bank or some other lending institution. When you approach them and request a loan, they research you and determine if you are a good risk. For businesses, that means they’ll examine your books and complete other due diligence on your business’s credit history. If the loan is approved, there will likely be monthly payments with interest, just like a mortgage. The lending institution has no control over how you run your company and no ownership. Once the loan is paid back, the relationship with the lender ends.

What is commercial credit?

Commercial credit is a line of credit offered to businesses that allow them to pay for a variety of business needs when cash is not available. A business can use their commercial credit line to pay for inventory, working capital needs, capital expenditures, and any unexpected expenses that may arise from running a business. It may also be used by to help fund new business opportunities.

To obtain a commercial credit line, a company would work with a bank to get approved, just like with debt financing. There are a variety of different types of commercial credit, each with its own pros and cons.

How does a business build credit?

The U.S. Small Business Association recommends focusing on five steps to begin addressing business credit.

  1. Choose the right business structure (e.g., LLC, LLP, or corporation)
  2. Obtain a Federal Tax ID Number (EIN)
  3. Open a business bank account
  4. Establish credit with vendors or suppliers who report to credit agencies
  5. Monitor your business credit reports

If you are already doing the above five steps, then you are on your way to managing your business credit well. If you are preparing to sell your business in the future, it is never too early to think about how your credit rating could affect that process. Please contact us for a confidential discussion of your specific situation. We have experience helping business owners across a variety of industries to sell their businesses, as well as relationships with buyers who are interested in new opportunities.

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