Business Credit 101

 

New Bottom Pic_StockSnap_3QX7WQCK52

“Whether you’re earning $7 an hour or $700,000 a year, it’s very important to protect your credit rating.”
-Frank Abagnale

Do you know whether your business has a good or bad credit rating? Creditworthiness, and by extension the ability to obtain credit, is one of the most important financial aspects of a business, because it influences whether your business will be able to take on debt such as loans, mortgages and, quite often, credit cards. This in turn impacts your business’s ability to raise and manage working capital. Whether you’re just starting out, or wondering how to build and protect the credit of your existing business, the following should be very helpful.

Getting Your Business Ready

If you’re just getting started, it’s important to take the necessary steps to make sure that your business is properly prepared. Among other things, this means ensuring that you have the proper licenses, certifications, and paperwork filed. First, a business must fall into one of the following categories: sole proprietorship, partnership, corporation, or LLC. Note that if you are operating a sole proprietorship or partnership, your personal credit report could also be used as a factor of credit. Next, confirm you have a working EIN or FIN number for tax purposes. Finally, have all other company specific licenses that are required for the particular industry and state in which the company operates.
At this point it’s absolutely imperative that you have a discussion with your partner(s), to assess personal credit histories, as this will have a direct effect on the overall financial character of your business. Any significant credit problems should be ironed out before starting your enterprise.

How Good Credit Benefits Your Business

Once your business is fully authorized as per regulations, you can begin building credit. There are a couple of ways your business can benefit from having a good credit score:
Secure better Interest Rates when Borrowing: Your business credit score will significantly affect the interest rates it can obtain from lending institutions. If your business has a low or poor credit score, it will likely incur more onerous financing terms.
With a good credit score, your business will have more options as to the different types of credit it will be eligible for, and have a higher probability of approval. If you’ve ever looked for credit cards before, you’re probably aware that credit standing for individuals and business entities is expressed on a scale. For personal credit, there is the standard FICO score from 300 to 850 that we’re all familiar with.

For businesses, however, the picture is slightly different. The Experian, Equifax and Dun & Bradstreet agencies use scales from 0 – 100, with a higher number indicating a better score. Scores above 80 are generally considered to have a low risk of borrower default. There is another business credit score that you need to know about: The Small Business Scoring Service, or SBSS. This is used extensively by the US Small Business Administration (SBA) to evaluate prospective loans on its 7(a) program. Scores on the SBSS scale range from 0 – 300, with 160 – 180 considered a strong enough score for a loan under $1 million. According to business.com, the SBSS score carries a strong component of personal credit history.

In general, the higher quality credit will require the business applicant to have an excellent credit score. Ultimately, the higher your business’s credit score, and the higher the credit scores of its principals, the better and more options you will have when exploring available credit.

The next article will look at how you can improve your business’s credit rating over time.

For more information on this and other matters related to your business credit, please contact Commander Capital Funding Group today on (888) 748-7731 or  info@commanderfunding.com.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s