A lot of times customers ask me about things that are WAY out of my league as far as knowledge goes. One of those things is building your business credit. While I know enough to be dangerous, I’m no expert. That’s why I was so excited to meet my new friend Gerri Detwieler. Gerri specializes in building business credit and finance for business, and she’s agreed to do a teleclass just for my readers – stay tuned for more info on that soon! Here’s an article she published about how to build your small business credit rating.
Building Your Business Credit Rating
By Gerri Detweiler
While bootstrapping your business and taking on no debt may be ideal, the reality is that most small businesses will borrow at some point to grow their enterprise, or even to get through a tough time. If you are an entrepreneur, the question will probably not be whether you will borrow, but whether you will do it successfully.
Fact #1: Small business credit reports are not always completely separate from personal credit scores.
You may have heard that small business and personal credit are completely separate. They can be. Some of the business credit bureaus, such as D&B and Credit.net, for example, do not collect information on individualsÃ¢â‚¬â„¢ personal credit histories, so that information will not become part of the businessesÃ¢â‚¬â„¢ credit score. But agencies such as Experian and Equifax also collect and maintain consumerÃ¢â‚¬â„¢s personal credit ratings, and they may blend that information with the businessÃ¢â‚¬â„¢s credit score to produce a combined score for a small business owner.
You may have also seen marketing hype about how a business credit profile can overcome a bad personal credit file. In most cases, however, itÃ¢â‚¬â„¢s important that small businesses have both good business credit, as well as solid personal credit on the part of the owners. This is especially true in the current environment where investors and venture capitalists arenÃ¢â‚¬â„¢t handing money out to anyone who can breathe and has a business idea! Even established businesses will find it necessary in some cases to provide the business ownerÃ¢â‚¬â„¢s personal guarantees on some loans or credit cards.
That means small business owners must be diligent about protecting and maintaining and optimizing their personal as well as business credit ratings.
Fact #2: The PaydexÃ‚Â® Score isnÃ¢â‚¬â„¢t the only score lenders use.
If you have researched business credit programs, you have probably seen them refer to the Paydex Score offered by D&B. While it is true that this is one important industry credit score, it is not the only game in town. In fact, there are lenders that will never use a Paydex score to evaluate your loan. They will rely on other credit reports and scores offered through Experian, SBFE, Equifax and other business credit bureaus. Some lenders report to one bureau, but not to others.
Knowing where you stand with each business credit agency is helpful if you are trying to borrow.
Fact #3: Paying your bills on time is not enough to guarantee strong business credit.
One company came to us after they had created a successful business, with over twenty employees. But they couldnÃ¢â‚¬â„¢t get a business loan because they hadnÃ¢â‚¬â„¢t taken the time to build a business credit profile and didnÃ¢â‚¬â„¢t know where to start.
To build business credit, you must borrow or buy products and services from companies that will report your payments to the major business credit reporting agencies. If your payment history is not reported, it isnÃ¢â‚¬â„¢t helping to build your business credit profile.
In addition, however, business owners should make sure they also have strong financial data about their company, for when it becomes necessary to ask a bank or financial institution for a loan. A business plan will also be helpful here.
If you understand what lenders are looking for, and approach a lender with a complete and well thought out proposal, you have a much stronger chance of getting approved.
Fact #4: When it comes to building business credit, you will want to get it right the first time.
Business credit reports are not covered by the federal law that governs personal credit reports. You do not have the same rights when it comes to disputing the accuracy of information in your file. Therefore, you want to make sure you start out on the right foot, or it can be difficult to get corrections or updates made to improve your rating.
And the sooner you start, the better. For example, one bank was recently offering Ã¢â‚¬Å“no documentationÃ¢â‚¬Â loans to businesses that were at least two years old. A business that had a two -year history, regardless of how successful it was, would likely qualify. And the longer your business has been established, the stronger its chances of approval since so many fail in the first two years.
Even if your business will make no money the first year or two, it helps to set up the proper business structure and take basic steps to ensure your business appears legitimate and stable to the business credit bureaus. That means getting the proper occupational licenses, and a phone number that is listed with directory assistance in the businessesÃ¢â‚¬â„¢ name, among other things. Your business will generally need some form of corporate structure to effectively build a business credit rating.
Your business credit plan should be part of your business planning from the beginning.
Fact #5: The small business owner is a sitting duck for scams, and expensive programs that may not be necessary or may even be harmful.
As a small business owner, you wear many hats and you probably donÃ¢â‚¬â„¢t have the time or money to waste on programs that donÃ¢â‚¬â„¢t work. But there are many expensive business credit-building programs out there that make exaggerated promises. Among some of the most egregious examples:
Ã¢â‚¬Â¢ DonÃ¢â‚¬â„¢t try to Ã¢â‚¬Å“buyÃ¢â‚¬Â good credit! Some companies will offer to Ã¢â‚¬Å“sellÃ¢â‚¬Â trade references for a large sum of money. This is a rip off and if the credit reporting agencies find out, they will purge those references.
Ã¢â‚¬Â¢ DonÃ¢â‚¬â„¢t spend large sums of money on a shelf corporation from a company that Ã¢â‚¬Å“guaranteesÃ¢â‚¬Â you will be able to use it to get loans. More often than not, the company wonÃ¢â‚¬â„¢t have the kind of credit rating youÃ¢â‚¬â„¢ll need to be successful.
Ã¢â‚¬Â¢ DonÃ¢â‚¬â„¢t try to get business credit as a substitute for bad personal credit. If you have damaged personal credit, work on rebuilding it while youÃ¢â‚¬â„¢re building business credit.
Entrepreneurs are usually hard-working, creative and willing to get the job done. Fortunately, those are the same qualities that will help you through the process of building strong business credit. Get started now!
About the Author
Gerri Detweiler is considered one of the countryÃ¢â‚¬â„¢s top credit experts. She has been interviewed for thousands of radio, television and print news stories including USA Today, The Wall Street Journal, The New York Times, Dateline NBC and many others. She has testified before Congress several times and worked on reform of the national credit reporting laws. With attorney and Rich DadÃ¢â‚¬â„¢sÃ‚Â® Advisor Garrett Sutton, she is co-founder of BusinessCreditSuccess.com.