Credit is the lifeblood of many small businesses. However, there are some significant differences between personal and business credit, and as a result there are also different business and credit scores. We see many small businesses turned down for the credit they need because they haven’t built business credit. Here’s how you can avoid that trap.
Business Credit Bureaus
If you track your personal credit score and credit reports (and you should), you’re familiar with the “big three” credit bureaus: TransUnion, Experian, and Equifax. The latter two are also involved in business credit reporting in addition to reporting personal credit. The third major business credit bureau is Dun and Bradstreet (often called D&B).
Business Credit Scores and Reporting
One key difference between personal and business credit is that unlike your personal credit — which the agencies monitor and score by default — you’ll have to register your business with the major bureaus in order to have your score calculated. Registration is quick and easy, and should be done as soon as possible.
Establishing Business Credit
In order to register with the major bureaus, there are three things you’ll need to do. First, register through the IRS for an Employer Identification Number (EIN) or Federal Employer Identification Number (FEIN). Second, register with D&B for a DUNS (Data Universal Numbering System) number. Finally, register directly with each of the credit bureaus; this can be done quickly and easily online.
Calculating Business Credit Score
Once you’re registered, each bureau handles scoring slightly differently than the others. Experian offers a single streamlined score. Equifax scores business credit risk (your likelihood to make timely payments) and a business failure score, which is a prediction of how likely it is your business will fail within the year.
Dun and Bradstreet has the most comprehensive scoring and reporting, generating reports based on a number of metrics that determine business health, financial stability, and bankruptcy risk. As with your personal credit score, business credit monitoring is vital to ensure that your reports are error-free.
Never the Twain Shall Meet
Now that you know the differences between business and personal credit, hopefully you have a better understanding of why it’s so important to separate personal credit from business credit.
With that being said, do not neglect your personal credit. This is especially true for small business owners and sole proprietors. As Experian warns, “[I]f you are a sole proprietor, your personal credit and your business credit are closely linked in the eyes of banks and other lenders.” Make sure you’re doing your due diligence on both fronts when building business credit.
Improving Business Credit Scores
There’s another key difference between credit scores that every business owner should know. Unlike your personal credit — where repairing incorrect items in your report is covered by the law — business credit offers fewer protections, making business credit repair much harder as a result.
Business credit offers higher capacity than your personal credit — sometimes several times more. If additional financing in the form of a working capital loan or revolving line of credit would help your business grow, business credit is the missing link. And if you’re trying to establish or improve your business credit, the missing link is installing a system. Contact us today to see how we can help you solve your business credit conundrums.