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It’s no secret that finding right financing is essential to the health of your small business. There’s plenty of capital available — lenders are sitting on a record amount of cash — but do the terms make sense for you? If you’re not in love with the business financing deals you’ve been offered, taking care of your business credit health should be first and foremost on your mind.
Let’s look at four fundamental principles that will help you both establish a business credit report and raise your business credit score.
1. Separate your business and personal finances.
Ideally, business owners will want to incorporate their business. However, even sole proprietors should get an employer identification number (EIN) and register their business with state and/or local agencies, and obtain proper business licenses.
Always consult with a tax advisor before changing your business’ legal structure. Small business owners should also get a business bank account and credit card, rather than a personal one. Once you’ve established a business line of credit, try to avoid dipping into your personal finances to subsidize your business. Keep the two separate so you don’t have to put your personal credit on the line every time you’re applying for a business loan.
2. Establish business credit accounts.
Establishing a business credit history requires accounts that report payment history to commercial credit agencies like Dun & Bradstreet and Experian. As a small business owner, obtaining a business credit card is an easy first step, since the decision is often based on the owner’s personal credit and finances.
According to a Manta and Nav survey, more than two-thirds of small business owners don’t have a dedicated business credit line, so that’s a good place to start. In addition, it’s important to do business with lenders and/or vendors that report.
3. Maintain a good payment history.
Payment history is the most heavily weighted factor in the majority of commercial credit scoring models, so aim to pay all your bills on time. To earn the highest D&B Paydex score, businesses must consistently pay early. For instance, if you have 30 days to pay, and can pay it earlier, do so.
Some lenders may also evaluate income and cash flow (from bank checking accounts, credit card receipts, etc.), maintaining a strong cash flow can provide you additional funding options, though that factor does not directly affect your business credit scores.
4.Know your scores, and check them often.
You’ll never be penalized for checking your own personal or business credit scores. Besides providing you with a composite picture of where you stand in terms of credit, these scores can point to any discrepancies that might be hurting your credit profile. For instance, if you notice a sudden and inexplicable drop in your business credit score from one month to the next, this might be due to a reporting error that you can correct.