How to Build Up A Business Credit Score
Building your company's credit history is important -- now more than ever. Most firms seeking loans aren’t examined by Venture Capital investors with the time and resources to carefully examine balance sheets. Major banks now issue fewer small business loans than ever before. For these financial institutions, the cost of evaluating a company’s standing, on their own, has begun to outweigh potential benefits. This is where credit scores present a solution. Lenders turn to credit scoring companies to model the financial stability of those seeking credit. With this, lenders can use credit scores to quickly filter companies based on their credit worthiness.
While individuals may be familiar with consumer credit scores, business scores play by different rules. If your plan is to build your company’s credit score, it’s important to understand their nuances and how they differ from their consumer-counterparts.
First, you should register for a D-U-N-S number. Though there are several different business credit scoring models, the D&B score is arguably the most important. In order to receive a D&B score you must register your company with the government. Contact the U.S. Small Business Administration and ask about getting a D-U-N-S number. This will act as a unique identifier for your company, like a social security number does for consumers. Vendors will lookup your company's D-U-N-S number from a database, in order to pull information on your company. The D&B scores importance is chiefly due to the fact that it has been around the longest, and is therefore used by a large number of lenders.
Once you have a D-U-N-S number, you can also use it to look up your own D&B score online. Simply visit the D&B website and you’ll be able to access your report for free. This is a crucial step, as it will allow you to see how you’re business is doing according to the D&B scale. Use the information in the report to identify items that may be lowering your rating. A D&B PAYDEX score ranges from 20 to 100, where the higher the number the better your company’s credit worthiness.
Pay your bills early, or at least on time. Though it may seem like obvious advice, there are usually far more consequences to a late payment than individuals realize. This is especially true for businesses. Apart from the fees, frequent late payments can be bad for your credit score. Unlike consumer scores, paying bills early can have an effect on your score. If you pay back your loan ahead of the due date, it will have a more positive impact on your score than if you waited to the last minute.
Don't ignore your personal credit score. One of the up-and-coming business credit score solutions is FICO’s SBSS. One way FICO differentiates itself from services like D&B, is by tapping into their vast network of personal credit scores. FICO SBSS scores take into account the personal credit history of the company’s principal owners. They reason that if the people running the company have their own finances in order, it is bound to correlate to how they run the company.
As more lenders begin to use FICO’s SBSS, you’ll want to make sure your credit score is in order. Otherwise, it may have a negative impact on your company’s score as well.
Open up small business credit cards in the company’s name. One of the easiest ways to start establishing your company’s credit history is by opening up a business credit card. The account will require a personal guarantor who will be responsible for all debts. Make sure, however, that the card account is tied to your company’s Federal Tax ID (or Employer Identification Number). If you fail to do this, the card will not have any impact on your businesses’ credit score.
As with consumer credit cards, you should take the time to optimize your choice of plastic. Though many credit cards offer rewards and 0% intro APR offers, they aren’t all created equal. Depending on which vendors your business shops with or how big its monthly budget is, one card may produce hundreds of dollars more in savings than another.