WHAT IS BUSINESS CREDIT: Definition, and Uses

what is business credit
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Just like your personal credit, a business credit reviews your company’s financial history and determines its capacity to repay loans and other financial commitments. A business credit reporting agency can help you determine your credit score, and we’ll look at some of these agencies in this article. We have also included tips for creating an effective business credit policy. 

Business Credit Definition 

Business credit is an estimate of a company’s risk or capacity to repay a loan or other financial commitments.

A credit score is assigned to a business credit report based on payment history, obligations, and credit utilization, as well as basic information about the company and information available in public records.

Business credit operates independently of a business owner’s personal credit profile. It is used when your company needs to borrow money from a lender.

For example, if your company requires extra working capital to run its operations, you could ask for a cash flow loan. As part of the application procedure for this loan, lenders will look at your credit for references on your company’s finances.

This is comparable to the process of applying for a personal loan. The loan, however, would be issued to the firm itself and would be based on the business’s credit.

What Is A Business Credit Good For?

A business credit lets you access the funds you require to expand, cover day-to-day expenses, purchase inventory, hire extra workers, and save cash on hand to support your organization’s costs.

How Business Credit Works

Understanding how to build your business credit early on will help you with more financial assistance alternatives. It can also help you separate your company’s credit and financial commitments from your personal credit.

Businesses that register as independent legal entities, such as a limited liability company (LLC) or a corporation, can create business credit. The company operates as a separate legal entity and is designated by its own employer identification number (EIN), which functions similarly to a Social Security number when obtaining loans and filing tax returns. 

Developing Business Credit

Having strong credit for your business has many advantages, including a higher likelihood of loan approval, reduced interest rates, and the capacity to negotiate contracts.

To develop a solid credit score for your business, you must grow your credit in the same way that you build your personal credit. There are a few measures you can take if you don’t yet have established credit:

  • Make sure your company is legally constituted as a separate organization, such as an LLC or corporation, by registering it.
  • Apply to the IRS for an employment identification number (EIN), which you can use to apply for credit.
  • Open a bank account in the name of the business to perform business transactions, which will help to separate personal and corporate finances.
  • Apply for credit, such as a small business loan or company credit card, to start establishing your credit.
  • Keep an eye on your company’s credit record and credit score.

Types Of Business Credit

#1. Business Credit Card

A business credit card is an easy way to start building business credit since it, like other credit cards, establishes a credit limit with funds that are paid off each month when used.

#2. Line of Credit

A line of credit functions similarly to a credit card in that it makes monies available for usage when needed. You only pay interest on the credit that you use.

#3. Term Loan

A term loan is a conventional, traditional loan issued by a bank or other lender that allows the firm to borrow money and pay it back in installments.

#4. Vendor Credit

Vendor credit allows businesses to purchase products or services by financing the cost of the acquisition.

Utility and other bills in the name of the business, such as internet and phone lines, are included in service credit.

The Advantages of Business Credit

Establishing a solid credit history could benefit your company in the following ways:

  • When borrowing money, you can qualify for larger loan amounts and lower interest rates.
  • Pay less for commercial insurance.
  • Receive better supplier agreements

If you don’t create company credit, you may be able to borrow money for your firm using your personal credit. However, if you are unable to return the money borrowed using personal credit, your personal savings and valuables may be jeopardized. Furthermore, utilizing your personal credit for your business may make it more difficult to qualify for a personal loan, such as when purchasing a car or a home.

Business Credit Score

A business credit score is exactly what it sounds like: a credit score that relates to companies rather than individuals. In general, credit scores are calculated using information given by business credit reporting agencies, which might contain corporate specifics such as the number of employees, historical data, prior payment history, account information, amounts owing, and more.

When it comes to business credit scores, you’ll undoubtedly note that they’re not on the same numerical scale as personal credit scores. Most company credit scores vary from 0 to 100, however, FICO Small Business Scoring Service (FICO SBSS) ratings extend from 0 to 300.

The Advantages of a Business Credit Score

A business credit score might assist you in obtaining credit for your company without relying on your personal credit. This can also be quite useful when it comes time to submit your taxes each year. Because the United States tax system requires you to keep your business and personal funds separate if you plan to deduct expenses, this separation can also help ensure that your personal assets aren’t used against you if your business runs into financial difficulties.

A solid credit score might also help you get reduced interest rates on business financing. If you take out a business loan, you will not have to sign a personal guarantee, which makes you personally liable.

Insurance premiums may be reduced. Insurance premiums can be prohibitively expensive, particularly for a growing firm. An excellent credit score, on the other hand, may assist your company in obtaining affordable rates.

Is Business Credit Same As Personal Credit?

Business credit is not the same as personal credit. Your Social Security number is associated with your personal credit. Your Employer Identification Number (EIN) or Tax ID Number, which the government uses to identify your business for tax purposes, is linked to your business credit history.

The Difference Between Personal and Business Credit Scores

  • Personal credit ratings normally vary from 300 to 850, but business credit scores range from 1 to 100.
  • While personal credit ratings are secret and only accessible in limited circumstances, anyone may check a business credit score to see how a company ranks.
  • Payment history, age of credit history, debt and debt consumption, industry risk, and company size all contribute to your business credit score. Personal credit scores are calculated using several parameters. These include payment history, the debt amount, new credit, credit mix, and average duration of credit history.
  • While your personal credit score is linked to your SSN, your business credit score is linked to an EIN. This allows you to keep your personal financial information secret while establishing and maintaining your company credit score. To receive an EIN, you must first check that your company is lawfully registered.

How Is A Business Credit Score Determined?

The most essential component that contributes to your business credit score, just like your personal credit score, is your payment history—whether you make adequate on-time payments on your bills. Business credit scores take into account the duration of your organization, and the longer you’ve been in business, the higher your score. Debt and debt utilization are important factors in determining a credit score, as are the industry you’re in and the size of your company.

Keep in mind that, unlike personal credit ratings, which can take into account many elements, certain business credit scores only take into account one. The only element included by the Dun & Bradstreet PAYDEX business credit score, for example, is your payment history.

Business Credit Reporting Agencies

Your corporation, like you, can have its own credit reports, just like you. There are other firms that produce credit reports, but the three most important business credit reporting agencies are:

  • Dun & Bradstreet Inc.
  • Experian Business Services
  • Equifax Small Business Services

If you’re familiar with the names Experian and Equifax, it’s because they also run well-known consumer credit reporting bureaus. Your business and personal credit files, on the other hand, are completely different.

Where Is Business Credit Information Obtained?

Business credit reporting agencies collect company information from a variety of sources and use it to construct business credit files. These are some examples:

  • Data providers: Lenders, suppliers, creditors, and other reporting entities 
  • Public Records: Courthouse information on liens, judgments, bankruptcies, incorporations, UCC filings, and state, local, and county business registrations.
  • Self-Reported Information: While not all credit bureaus accept self-reported information, if they do, it may include information provided by firm leaders.

Dun & Bradstreet, Equifax, and Experian are also Certified Vendors with the Small Business Financial Exchange (SBFE), a data warehouse that gathers multiple points of data about businesses from lenders and other reporting organizations. Purchasers of business credit reports from these agencies (and a few others) have the option of including SBFE data.

Who Has the Authority to Check Business Credit?

Business credit reports, unlike consumer credit reports, are not private. Before credit agencies can offer access to your credit information, a business must have a “permissible purpose” under the Fair Credit Reporting Act.

Your company has no such right. Business credit bureaus have the legal right to sell your information to anyone who is willing to pay for it. This loss of privacy is another reason why you should examine the health of those business reports yourself.

How to Create Business Credit Policy

Creating, fine-tuning, and enforcing a solid business credit policy will assist limit exposure to clients who are unable to pay on time or within terms. The Credit Research Foundation famously formulated the six key questions for creating a business credit policy. The answers to these questions form the foundation for the type of credit policy that will be most beneficial to your business.

  • What is your goal?
  • What are your objectives?
  • Who is responsible for certain credit issues?
  • How is credit assessed?
  • How do collections work?
  • What are your payment terms?

Advantages of a Business Credit Policy

A solid credit card policy can maintain uniformity throughout your account portfolio and help lead to stable and predictable cash flow by explicitly outlining processes and procedures. It should be based on your extensive knowledge of your organization, its risk tolerance throughout the portfolio, and your previous experience with clients, their sectors, and payment habits.

How Do You Establish A Business Card Without A Guarantee?

To obtain a credit card without a personal guarantee, you must demonstrate to creditors that your company has a track record of successfully repaying debts. You must also demonstrate that you are a well-established company with consistent profitability.

In Conclusion

When it comes to growing a solid business, establishing good business credit is crucial. Business credit ratings, like personal credit scores, provide strong insight into a company’s success to potential creditors, investors, and business partners.

You can remain on top of it by developing sound financial habits, beginning with selecting the appropriate card for your business, monitoring your credit reports on a regular basis, and contesting any errors that may arise along the road.

Frequently Asked Questions

Does an LLC have a credit score?

Yes, an LLC has a credit score, and it is influenced by your personal credit history.

How long does it take to build a business credit?

On average, it takes three or more years to build business credit, although some lenders may require only a year.

Why do businesses offer credit?

Businesses offer credit to their customers to make their organization credit makes your organization appear more legitimate and established.

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