How Important Is Your Business Credit Report?

Having access to capital for your business is critical. One factor that can greatly influence your business's access to funding is your business credit report. In this article, we will discuss what a business credit report is, how important it is, what impacts it, and how to build your business credit.

What Is a Business Credit Report?

Your business credit report, like your personal credit report, indicates how your business manages its finances and financial obligations. It provides insight into your creditworthiness and ability to repay any potential extension of credit. The data that the report contains can make or break your company's ability to secure funding. Experian, Equifax, and Dun & Bradstreet are the three credit agencies that compile business credit reports.

While business credit reports are similar to personal credit reports, there are a few differences. First of all, you can access your personal credit report once a year for free, from the three credit agencies. Business credit reports can range anywhere from $40 to $100.

Secondly, anyone can purchase a business credit report, whereas your personal credit history is largely private. Thirdly, there is more variation in how business credit scores are calculated among the three agencies. Lastly, your business credit score can range from 0 to 100, unlike 300 to 850 for personal scores.

What Information Does Your Credit Report Contain?

Generally, credit reports from the three agencies will have the same information, but each agency has its own process for ascertaining the data and verifying it. Credit reports will typically include company information, public filings, and financial information.

The first bit of the credit report will contain company information. This can include the legal name, address, ownership, operation data, incorporation status (whether it's an LLC, LLP, corporation, etc.), and even the number of employees.

The second bit of the credit report will contain public filings. Public filings include bankruptcy, collections, UCC filings, and any legal judgments against a company. If a company has any of these on its credit record, it may hinder its ability to secure future credit. If your business is looking to partner with another business, it may be helpful to check their business credit report first to see if they have any outstanding balances that indicate financial trouble.

The third section of the credit report contains your financial information. Financial information will include annual sales, outstanding balances, past credit, and current credit terms. This information will be used by lenders to identify the amount they are willing to lend.

If your financials indicate that your annual gross revenue is significantly less than your loan request, they may not approve it. You can review this information about another business as well before extending a net 30 account or similar payment arrangement.

What Impacts Your Business Credit?

The first factor that impacts your business credit is your creditworthiness. Creditworthiness is the potential for more credit based on how you've used credit in the past. If you have a good track record of paying off creditors on time, if you didn't max out your credit limits, and you don't have bankruptcies or collections, your creditworthiness will be higher.

Since creditworthiness depends on your credit history, not having a credit history can impede your future financing endeavors. If your business has no history of using credit, prospective lenders and investors don't have an idea of how reliable you are with paying your debts — and this can turn some off. On the other hand, having a solid history of timely payments will increase your creditworthiness.

Other factors that affect your business credit include your business assets, such as capital and collateral. Lenders want to know how serious you are about your business, and they look at your investment in your business for an indication. For example, if you seek out a $100K loan but have only invested $1K of your own money, lenders may be hesitant to grant the full loan amount.

Conversely, if you have invested tens of thousands of dollars, it could be easier to secure a higher loan amount. Similarly, if your business has collateral (physical products, bonds or stocks, equipment, real estate, etc.), it will look better on your credit report than if your business doesn't have any assets.

An additional factor that impacts your business credit is your personal credit history. Even if you start an LLC or a corporation — which creates a separate entity — many lenders will pull the owners' credit if the business is young or hasn't brought in a lot of revenue.

How Do You Build Your Credit History?

If your business is relatively new, you may not have a long track record, so where do you begin? The first action to take is to check the credit agencies to see if they have a profile for your business. If they do, ensure that the information is correct. Incorrect information can damage your business reputation, leave you with a mess to clean up, and prevent you from obtaining financing.

After you have checked your business credit history, apply for a DUNS number. A DUNS number is an identification number for your business. It is assigned by Dun & Bradstreet, one of the business credit agencies. It is used worldwide to identify businesses and look up their D&B Live Business Identity. DUNS numbers are often requested by lenders and investors alike, so getting one early could save you time down the road.

The easiest way to begin generating a credit history is to apply for a business credit card. It keeps your business and personal finances separate, helps track your expenses, provides some flexibility in your business budget, and generates a business credit history. If you already have bad credit, a secured business credit card may be helpful.

You can also request a net 30 account from your suppliers. In short, a net 30 account is when you request your vendor or supplier to delay your payment of their product for 30 days. It acts as a line of credit because you receive the product in advance of payment.

Net accounts can go up to 90 days, depending on what the vendor is comfortable with. If you establish a net 30 account with a supplier (or net 45, 60, 90, etc.) and they report your timely payments to a credit agency, it will reflect positively on your credit account.

What Should You Do Next?

Your next step depends on where you are right now. If you haven't checked your business credit report recently (or ever), that would probably be a good place to start. Ensure that your credit report is accurate so it doesn't come back to haunt you later.

After you have verified your report, it may be time to build your business credit. Not doing so could prevent you from accessing financial assistance when you need it most. Consider opening a business credit card — either secured or unsecured. If your credit is already in good shape and you are ready to take out more credit, there are many financing options to pursue.

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