Where did you get the money to start your business? Did you tap personal savings, get a bank loan or use your personal credit card?
According to the , about 13% of new business owners use personal credit cards to start a business. The obvious advantage of credit card financing is that it’s easily obtainable if you already have good credit. But you might want to consider applying for a business credit card to start building your business credit score as well.
Often, new business owners think business credit is just for the big companies – the ones who finance major equipment purchases or place big inventory orders. But owners of businesses of any size should be aware of the risks and rewards of business credit.
Gerri Detweiler, a credit expert and Head of Market Education for , says there are a few reasons it’s important to establish business credit, even if you’re not looking for a loan.
“You may find that business credit data plays a role in your business even when you’re not using credit,” Detweiler says. If your small business wants to do business with larger companies, Detweiler cautions many larger companies to screen potential partners and vendors by checking their business credit to look for red flags—a process you may not even know is happening.
With your personal credit, a company needs to get your permission before ordering your credit report. But there are no such protections on your business credit. Anyone can check your business credit report, and they don’t have to disclose it to you.
“It’s a legitimacy factor,” Detweiler says. “If you’re serious about starting a business, you want to set it up to be as professional as possible. Business credit is one aspect of that.”
Separating your business and personal finances also makes it easier to separate transactions and track your business expenses.
Using a personal credit card to pay for business expenses usually not a good idea. It makes separate personal charges from business expenses at tax time more difficult. Even worse, if you carry a balance from month to month and plan to deduct the interest expense paid for business purchases, calculating the portion of interest applicable to your business charges can be a nightmare. Do yourself a favor and keep business and personal charges separate.
Building business credit is a little different from building your personal credit. With your personal credit, you establish a credit score by applying for a credit card or loan that gets reported to the credit bureaus. For business credit, you’ll need to request a DUNS number.
DUNS stands for Data Universal Numbering System, and it’s a system developed by Dun & Bradstreet to give a unique nine-digit identifier to businesses. Think of it as a Social Security Number for your business.
You , for free, by providing some basic information including your business name, address and phone number. You may already be on Dun & Bradstreet’s radar if you’ve filed as a legal entity with your state or obtained a business license. Detweiler says the credit bureaus sometimes pick up on those activities, too. “You won’t have much in your file until you actually get accounts that are reported to business credit reporting agencies,” Detweiler says.
The three major business credit bureaus are Dun & Bradstreet, Equifax and Experian. To build your credit score with them, you have three options:
Most business credit cards report to at least one of the three major business credit bureaus, but not always. When you apply for a personal credit card, you’re almost guaranteed to have that account show up on your personal credit report, but Detweiler says credit reporting is much less consistent on the business side.
“You can have accounts you’ve maintained for years that are never reported,” Detweiler says. “I’ve seen accountants and attorneys operating for ages that have no business credit.”
Open a vendor account with a company like or . These companies sell things like office and shipping supplies and even coffee and snacks. Detweiler says they will usually grant a small line of credit with net 30 terms. Then simply buy supplies your business needs on credit and pay your invoices by the due date. Within a few months, these accounts should show up on your business credit reports.
Typically, paying bills like your cell phone, utilities and internet won’t show up on your credit report (unless your account is sent to collection). But allows you to build your business credit using the bills you’re already paying, even if they’re not in your business’ name.
When you sign up for an eCredable account, you can link up to eight eligible accounts, such as electricity, water, gas, mobile phone, cable or satellite TV, internet or landline phone. The service will download your payment history from the service provider and report your payment history to the credit bureaus.
Keep in mind, though, there is a fee for this service. Currently, eCredable charges $49.95 to set up your account and $9.95 per month after that. However, it’s an interesting alternative to help small business owners establish a credit score without applying for credit.
Whichever route you choose, you’ll probably need to have some patience. Detweiler stresses it usually takes 60 to 90 days for these accounts to show up. “But once it starts reporting, you can usually get results pretty quickly,” Detweiler says.
Once you’ve established your business credit score, you’ll want to keep it healthy. This is one of the few areas where business credit and personal credit are similar: paying your bills on time is essential.
Detweiler says payment history is typically the most heavily weighted factor in calculating a business credit score. “In some cases, it’s the only factor,” she says.
It’s also a good idea to get into the habit of checking your score regularly. According to a , 25% of small business owners who checked their business credit reports found errors that put them in a riskier category with potential lenders or suppliers.
Part of the issue stems from the fact that small business owners just aren’t as diligent about checking business credit reports as consumers are about monitoring personal credit. But there are also fewer legal protections.
If you do notice mistakes in your business credit report, dispute them right away. “There aren’t any federal laws governing disputes,” Detweiler says, “but generally credit agencies want to provide accurate information. Hopefully, disputing errors with the credit bureau will take care of it.”
Business credit is a huge factor in a number of business relationships. With a strong business credit score, you can access lower interest rates, more favorable loan terms and lower insurance rates. Your suppliers may be willing to give you extra time to pay invoices. You could be eligible to apply for profitable government contracts.
As a business owner, there are many areas of your business that need your attention. Your business credit is one of them.