12 Nov 2007
Building Business Credit Made Simple
By Norman David Roussell
Author of the book, Principles of Building Business Credit
Most start-ups and growing businesses are financed with a combination of personal savings, investment from friends and family, business loans, and personal credit cards. While this “financing mix” is common, it is not optimal. By adding business credit to the financing mix, you can optimize your financing options and give your business the best chance for long-term success. In other words, if you own a business you need business credit. The conundrum for most entrepreneurs, however, is how do you build business credit?
Building business credit is a process that begins with gaining a basic understanding of business credit and how it works, and continues with setting-up a formal business structure, registering your business with Dun & Bradstreet, applying for business credit, and paying your bills promptly to build a positive business credit profile.
Business Credit: The Basics
Business credit, also known as trade credit, is credit extended by one business (the creditor) to another business (the borrower) for the purchase of goods or services. Like personal creditors, business creditors evaluate the creditworthiness of a credit applicant to determine whether or not to approve a business credit application. If a company has a business credit profile and a track record of repaying credit obligations on time (or early), the company has a good chance of qualifying for business credit. If a company does not have a business credit profile, business creditors will have no choice but to rely on the personal creditworthiness of the business owner to make a sound credit granting decision.
In addition to helping maximize the financing options available to your business, there are two other main reasons why you need to build business credit.
1. Building business credit helps you separate your personal from your business credit obligations.
2. Building business credit helps you avoid having to provide a personal guarantee when you apply for business credit.
Set-Up Your Company
Before making credit decisions on business credit applicants, business creditors search public records and other primary and secondary sources to verify if a business is truly in business. That is why the first step in building business credit is to create a formal business structure. A formal business structure is either a corporation or limited liability company that has a Federal Employer Identification Number (not the owner’s Social Security Number), and has the proper state, local, and industry-specific business licenses. A formal business structure should also include:
› A commercial business address
› A telephone number in the name of the business listed with directory assistance
› A company website with e-Mail capabilities (e.g., norman@buildingbusinesscredit.com)
› A bank account in the name of the business
While you may be able to secure business credit without following the recommendations above, following them can improve your chances of securing business credit when you apply.
Register with Dun & Bradstreet
There are seven major business credit bureaus in the United States- Experian, Equifax, Business Insight, Credit.Net, ClientChecker, Accurint, and Dun & Bradstreet. However, Dun & Bradstreet is only business credit bureau you need to register with in order to start building business credit.
You register your company with Dun & Bradstreet (www.dnb.com) by applying for a Dun & Bradstreet DUNS Number®. A DUNS Number® is to a business what a Social Security Number is to an individual. The Duns Number®, not the Federal EIN, is the number used by creditors to obtain a copy of your company’s business credit report. Once you have registered with Dun & Bradstreet and obtained your DUNS Number®, you are ready to apply for business credit with business friendly creditors.
Where to Apply for Business Credit
When you are in the process of building business credit, you should apply for credit with business friendly creditors first. Business friendly creditors are those that:
- Offer credit to start-ups
- Offer credit to businesses that have not established a complete business credit file
- Report your payment history to Dun & Bradstreet (and Experian).
Most business friendly creditors start you out with a low credit limit (usually under $500) and will provide credit under Net 30 terms where the entire outstanding balance is due and payable 30-days from the time of purchase. You should open three to four accounts with business friendly creditors, make some purchases (e.g., 4-5 purchases of at least $50 each) and pay-off the balances early or on time. Once you have 4-5 trade payment experiences reported to Dun & Bradstreet, you will have a complete business credit profile and a Paydex Score®.
The Dun & Bradstreet Paydex Score®
The Paydex Score® is to a business what a FICO Score® is to an individual. The Paydex Score® is a numeric indicator or how you pay your business credit obligations- early, on time, or late. The Paydex Score® ranges from 1-100 and a score of 80 is considered a good Paydex Score® because it means you pay your business credit obligations within terms (on time). The Paydex Score® is a leading factor in the credit granting decision.
The information in your company’s business credit report, along with your company’s Paydex Score®, and information creditors gather by searching public records and other primary and secondary sources determines will determine the overall creditworthiness of your company. Having a Paydex Score® of 80 or above and an up-to-date business credit report will help you secure the business credit you need to grow your business.
Tips on Building and Managing Your Business Credit
› You should begin to build business credit the day you start your business so that you have access to business credit before, not after you need it.
› In order to maintain a positive business credit file you must continue to make purchases and pay your bills on time. Your Paydex Score® is comprised of your payment history over the previous 6-month period only. In other words, “if you don’t use it you’ll lose it.”
› Whenever a change occurs within your company (e.g., new address or telephone number) you should report that change to Dun & Bradstreet to ensure your business credit profile is accurate and up-to-date.
› Business credit is not a substitute for poor personal credit. If poor personal credit is a problem, begin to repair your personal credit while you work to build your business credit.
Building Business Credit Made Simple
Copyright © 2007 by Norman David Roussell
All rights reserved.
About the Author
Norman David Roussell is an entrepreneur, business consultant, and the author of the book, Principles of Building Business Credit. Principles of Building Business Credit is a comprehensive book that teaches entrepreneurs the systematic process for establishing a business credit profile and building business credit. For more information about Principles of Building Business Credit or to contact Norman David Roussell, visit www.BuildingBusinessCredit.com.
Norman D. Roussell, MBA
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