By now, nearly every adult understands personal credit ratings and their importance when it comes to sourcing loans and advancements. However, only a few people could truly say they understand business credit or its importance.
For a normal individual, this could be forgivable, but for a business owner, especially a small business owner, it is not. Business credit is so important to small business owners that,
understanding the concept and how to use it to their advantage could make a significant
the difference in their business transaction and growth.
What is Business Credit?
Business credit is the record of all of the financial engagements that a business is involved in. It reveals in great detail the business investment, assets, liabilities, income, and other inflows and outflows of the business. Through the business credit, it is easy to know if a business is doing well or not. It would also be revealed if a business has been able to fulfill its past credit obligations or not. Just like the personal credit rating, just by looking at a firm’s business credit, a lender, investor, or partner would be able to decide if they want to work with such business or
In the United States, business credits are determined by a number system that ranges from 0 to 100, Ideally the higher the number a film scores on its business credit ratings, the better positioned it is to attract investors, get loans and advances and possibly get people to believe in its brand. The numbers are not just arrived at; they are calculated through the various activities of the business by the various credit bureaus. Hence, you could say, a firm’s business credit is a consequence of its actions over a certain period. Usually, a business credit rating of 65
and above is termed very good and acceptable.
Why Business Credit?
One of the first valid questions everyone asks when you talk to them about business credit is,
why business credit? After all, they have been doing the business for quite a long time now without having a hint of what it is about. Why now? And if you factor in the fact that a poor business credit could be a bad thing for the business, it just doesn’t seem to make any sense why anyone would want to start the process of getting a business credit for their small business. As much as this concern is real, it is not genuine, and it is quite shallow a reason for any business not to get a business credit record for their business in this age and time. You must know that for
every single reason you might have about not getting a business credit record for your small
business, there are hundreds and better reasons to take the bold step to do it today. We
would be highlighting a few reasons for you below why it is pertinent for you to get a business
credit for your small business.
You Need It: Just like the personal credit rating, every business needs to get a business
credit at some point soon enough to be considered a legal business. The business credit
shows in great details the operations of the business, and this is a very important thing for
the policymakers in charge of the small, medium, and large business enterprises in every
Helps in Securing Loans and Advances: Securing loans and advances from financial institutions is what every small business desires. After all, to grow, you need to be able to expand your business, and how do you get to do that? Accessing credit facilities. Just like the personal credit ratings though, banks and other financial institutions would be very much interested in your business credit ratings before they grant you advances. They are in the business to make money, and if they can’t get a hold of documents showing your financial credibility and records, they wouldn’t want to have anything to do with you. Hence, it is important to work on your business credit ratings if you wish to access loans and advances. Also, your business credibility would go a long way in determining the interest rates banks use in lending to businesses. If you are able to get a hold of your business credit from the onset through planning, then you would stand a great chance of getting great loan advances with favorable terms.
Partnership Needs: At some point in your business, you might need to get into partnership deals with other firms to grow and dominate a particular market.What you should know is, firms look forward to working with thriving businesses, and one of the ways to discover this is through your business credit. Prospective partners would like to see your books and look through your business credit to ascertain if they would be willing to work with you. If you have been able to put your business credit in the perfect place, your small business would be very attractive to potential partners.
Mergers and Acquisitions: Mergers and acquisitions are bound to happen in business.
Most times, they are for growth and development. Since it usually involves two or more parties coming together to discuss terms about business and how to go about it, firms you wish to merge with, acquire, or that wish to acquire your assets would be interested in seeing your records. No businessman wants to walk straight into a trap. What would make any business wants to work with you are great business credit records which you must have built over time through practice and adherence
Factors that Affect Business Credit
Every firm wants to have and maintain a good business credit rating, but not all end up getting it.
A lot of startups are currently doing poorly with their business credit records. What then could be the problem? Why are some firms doing very well why others are doing pretty badly at the base of the pyramid? It all goes down to actions and consequences like we rightly pointed out above. Actions have consequences, and all small business owners must understand what they must do right to attain and maintain excellent business credibility at all times.
As such, we shall be discussing several factors that directly or indirectly affects the business
credit ratings of small businesses below.
Bankruptcy: Bankruptcy is a situation whereby an individual or firm is unable to meet its current obligations. Invariably, such a firm or individual is broke and unable to pay its debts. When a business has a history of bankruptcy, it is going to weigh heavily on the business credit rating. After all, the business has accessed financial securities in the past and has ended up being unable to pay back. This is a red flag and it would put every other lender off. A situation like this would most definitely have a very negative effect on the
the credibility of any small business.
Bill Payment: Bill payment is also another factor that the credit bureaus look at when calculating the business credit of any firm. They would be interested in knowing if this particular firm has been paying its bills in the past. Municipal bills, power bills, insurance bills, health bills, etc. must be paid promptly and accordingly by your small business to have a good chance of attaining a good business credit rating. Like we said, every single decision matters, and you must not be found wanting in this area. Also, it isn’t always about if you pay sometimes, it is how and when you paid. Did you pay voluntarily or you were dragged to pay? All of these would count for something in arriving at the business credit figures for your business.
Business Revenue: The streams of income you can generate as a business also have a part to play in determining your business credit rating. Are you able to generate enough business revenue to meet your everyday business needs? What is the ratio of your revenue to expenses? All of these factors are highly considered by the credit bureaus
when working out your business credit figures.
Your Lines of Credit: The credit bureaus are also very concerned about your lines of credit. They want to know if you have sufficient funds in your various lines of credits as this would serve as a shock absorber for your business going forward. If your lines of credit are not sufficient, it may negatively affect your business credit ratings.
How to Build Your Business Credit
Now that you understand the importance of building business credit, the next step is to put you through the process of building it without much fuss. If you are a small business owner whose
the business currently doesn’t have business credit, here are the simple steps you need to follow to
get it done.
Register Your Business: The first step you must take is to register or incorporate your business. A business name is different from an incorporated business, and as such, you should take the bold step to incorporate your business. Most times, businesses suffer because of the poor credit ratings of the owner. This shouldn’t be the case. By
incorporating your business, you have made it an independent entity and it would be
treated as such by the authorities.
Get Your Tax Identification Number (TIN): The law in every clime necessitates that every incorporated business must have a federal tax identification number. This is what confirms your small business as a legal entity and it is the reason why it would be treated as such. Your federal TIN would be used to file tax returns in the
Open a Business Bank Account: Once you have incorporated your business, you are prevented from using personal bank accounts for your firm’s business transactions for transparency’s sake. As such, you must open a business bank account for your newly incorporated firm.
Obtain Business Credits Cards: Since you have a business bank account now, it is also
important that you obtain business credit cards and credit them with sufficient funds.
Remember your credit cards would not be useful for business
transactions again, this means you need to obtain the legally binding business credit cards
for the day-to-day running of your business.
Contact the Credit Bureaus for Your Business Credit: After you have successfully
completed all the steps above, you should then reach out to one of the credit bureaus to
help you in setting up your business credit. For emphasis, you should
know that there are quite some credit bureaus that you can work within building
your firm’s business credit. Firms like Experian, Trans Union, and Equifax have been
trusted for years in the United States, and you can also work with any of them to help
your business in building the desired business credit provided you have fulfilled all the
requirements listed above here.
Getting a business credit as a small business owner is no longer an option for anyone. It has
become imperative, and any serious-minded business owners would be wise to get themselves
accustomed to how things work now to make the best out of their business through
It is also important for you as a business owner to keep a close eye on your business credit ratings. Make it a point of duty to visit the bureaus from time to time to check out the situation of things and discuss what could be done to make things better. Also, we have seen some cases of mistakes in arriving at a figure through data mix-up. You don’t want to fall victim to this, hence the need to always stay on top of proceedings by keeping tabs with the credit bureaus about matters concerning your business credit.