2. Applying for Credit for Your Business

It’s important to separate your business and your personal credit cards as your business starts to grow. Keeping your business cards separate helps with record-keeping — many card companies provide special spending reports that can tie in with your business book-keeping software and make it easier to keep track of your business expenses at tax time. But your personal credit history might still play a role in qualifying your business for credit.

Improving Your Credit Report & Score

Potential lenders generally review your personal as well as your business credit record when deciding whether or not to grant credit to your small business — especially when your business is young. Your credit score is a key ingredient that determines if your business will qualify for credit, and at what interest rates. Many lenders — and others — use your credit score to help determine whether or not to give you a line of credit for your business. The higher the score, the lower the risk…and the lower the interest rate you’ll usually be offered.

Your credit record also affects your ability to find affordable insurance. So it’s always important to build — or rebuild — a good score…even if you don’t have immediate plans to take out a new loan.

How Your Score Is Calculated

There are several types of credit scores, but most lenders use the FICO score, which ranges from 300 to 850, and is calculated by a credit reporting agency (such as Equifax, Experian or TransUnion).

Your FICO score measures five key criteria and can vary slightly, based on which credit reporting agency issues the score. The information that shapes these criteria comes from your credit report, and includes:

  • Length of credit history
  • Types of credit lines
  • Payment history on those credit lines
  • Amounts owed on those credit lines
  • New credit lines — how many and over what period of time

BBB Tip: Credit Reports

Check your credit report for errors or potential fraud once each year. You can order a free copy of your credit report from each of the three credit reporting agencies once every 12 months by visiting www.annualcreditreport.com. This site is run jointly by the three credit reporting agencies (Equifax, Experian, and TransUnion).

It’s a good idea to stagger your requests for a copy of your credit report, requesting it from one bureau every four months. This will help you monitor your credit over the course of a year and detect potential fraud early.

Additional Suggestions

  • Review your credit report annually, and fix any errors you find.
    • Get a free copy of your credit report at www.annualcreditreport.com
    • If you find any mistakes, you must contact each of the three credit reporting agencies
      www.equifax.com     www.experian.com     www.transunion.com
  • Pay your bills on time.
    • More than one-third of your credit score is based on your payment history. The later you are, the more points you lose. If you’ve missed payments, get current…and stay current.
  • Keep your credit card balances low.
    • Another one-third of your credit score is based on your “credit utilization ratio,” which is the percentage of your credit limit that you’ve actually used. If you’re close to the limit, it’s a flag to potential lenders that you’re maxing out your cards.
    • It’s a good idea to keep your purchases to less than 25% of your credit limit at any time, even if you pay off your bill in full every month.
  • Limit the number of credit cards and/or lines of credit you open.
    • The length of your credit history accounts for 15% of your credit score. Opening a handful of new cards/lines of credit within a short period of time can hurt your score, because it lowers the average age of your accounts. Lenders worry that you plan to borrow money you may not be able to repay.
    • It’s usually a good idea to keep open old cards with a long credit history, which also helps your credit score, because they contribute to your “credit utilization ratio.”
    • If you determine you want to close old cards, close them one at a time over a period of time. But, choose carefully, because the oldest may be important to a better credit score.
  • Promptly pay any traffic or parking tickets or library fines.
    • If the bill ends up going to a collection agency, your credit score could drop by as much as 100 points. Pay these bills on time, and keep records of the payment.

BBB Alert

BBB urges caution about any company that advertises a “free” credit report.

Generally, these offers aren’t truly “free,” because you need to sign up and pay for other services in order to get your “free” credit report.

Building Your Business Credit Record

As your business starts to grow, it’s important to build a credit record for your business that is separate from your personal credit record. Getting credit in your business’ name can help you qualify for lower rates on loans and leases, and can help protect your personal credit record — which could suffer if you have too much business debt. It’s never too early to start to establish a separate credit record for your business, even if your business is still in the very early stages. The following steps can help:

  • Establish a consistent identity. Always use the same business name, address and phone number from the beginning, so it will be easy for the credit-reporting agencies to keep your records in one file. Consider incorporating to legally establish a business identity that is separate from your personal identity.
  • Open your first accounts. Get a separate checking account for your business. Also open an account with an office-supply firm or other supplier that reports the transactions to business credit-reporting agencies. Make small charges and pay them immediately — before the invoice even arrives (unlike personal credit scores, you’ll get extra credit for paying before the due date).
  • Provide key documentation. Lenders will generally ask for your business’s tax records and earnings statements for the past few years so they can see how much you have earned in the past. And they may also ask for a business plan so they can assess your potential for future earnings. They are often interested in looking at your cash flow in relation to expenses and your total debt in relation to your earnings. Provide all of this documentation along with explanations to present the strongest case, especially if you have irregular earnings throughout the year, to prove to lenders that you expect to earn enough money to pay your bills in the future.
  • Apply for a DUNS number from Dun&Bradstreet, one of the major business credit-reporting agencies (go to www.dnb.com). It usually takes 30 days to establish a DUNS number, or you can pay extra for an expedited account. Then make sure that the companies where you have trade accounts are reporting the information about your on-time payments to Dun&Bradstreet. It’s also a good idea to provide extra information about your business for your credit file. This is where potential lenders and others will find out about your business and the likelihood that you’ll make on-time payments for your loans, equipment leases and office leases, which will affect the terms and rates. After you have a DUNS number, open a few more trade accounts with other companies that send information to the credit-reporting agencies, make small charges, and pay those bills early, too. Check your account for errors and to make sure you’re getting credit for your early payments.
  • Check your business’ credit score. Similar to a credit score for individuals, a PAYDEX score distills the information in your Dun &Bradstreet credit report into one number, which shows potential lenders the likelihood that you’ll make your payments on time. These scores range from a low of 0 to a high of 100. A score of 80 to 100 generally means that you pay your bills before the due date; 50 to 79 means a medium risk of late payment (averages 30 days or less beyond the loan’s terms); and a score of 0 to 49 means a high risk of late payment (averages 30 to 120 days beyond the terms). Lenders can also get a comprehensive D&B report, which shows your PAYDEX score trends over the past few months and information about the size of credit extended and the percentage of time that your business paid within the loan’s terms. Experian, which is one of the main credit bureaus for personal information, also maintains business credit reports. Go to www.experian.com to check your business record and your score. Experian’s business reports also show your payment trends, highest credit amount extended, number of tradelines reported, and your credit ranking score.
  • Expand your credit profile. A business line of credit can help with key cash flow needs in an emergency, and can provide overdraft protection to your business checking account. You may not be able to qualify for a business line of credit immediately, but you can take several steps to work your way up to it. After you’ve started to build a solid business credit report and score, then you can apply for a business credit card on your business’s own record (rather than your personal record). The bank may gradually boost your credit limits after you start to show that you have good experience paying back your loans. You can also build your credit record by applying for a small business loan from a bank (you may have the best luck at the bank where you have your business checking account), which will help your credit record if you pay the loan in full several weeks before it is due. Showing a good payment experience with these small loans, while building a strong credit history with your trade accounts, can help you qualify for a business line of credit.

BBB Tip: Automatic Electronic Payments

Consider activating an automatic electronic payment schedule with your bank, so you’ll never be late for a payment.

NOTE — Some lenders have recently increased their minimum payment requirement from 2% to 5% of the outstanding balance to 5%. If you’re only paying the minimum balance due, make sure your lender has not increased its minimum payment requirement.

It’s a good idea to have the automatic payment pay much more than the minimum. You’ll owe less in interest and can pay down your balance much faster.