How To Build Business Credit Without A Personal Guarantee.
So you've heard wonderful things about "Business Credit" but you're confused on how it works? what is it? and what's in it for you?
This article will not only answer all of your questions but also put you on the right track to building your own businesses credit profile in no time!
Business credit is simply your businesses credit profile that keeps track of how you pay your bills. The great thing about building a solid business credit profile is it allows you to take advantage of much more of the credit you have been granted. Unlike a personal credit profile, utilization does not drop your business credit scores as significantly as it does on a personal credit profile. The number one reason for building business credit is to separate yourself from your business entity, Including finances and liabilities.
Your business credit profile is monitored by 3 bureaus:
-Equifax Small Business
-Dun & Bradstreet
-Experian Business Information Services
Each of these reporting agencies use different metrics to calculate your scores.
Equifax Small Business:
Equifax Small Business bases their scoring on payment trends, credit history, public records, and firmographics. The payment index score for Equifax looks at a business’s payment history for the past year. Equifax uses public and trade records as well as data from the Small Business Finance Exchange, non-profit organization of small business lenders across the U.S. The demographics of your company such as size, industry, and age will also play a role in your scores.
Dun & Bradstreet:
Dun & Bradstreet has a few different facets when it comes to calculating your scores. D&B factors in D&B PAYDEX, D&B Delinquency Predictor Score, D&B Financial Stress Score, D&B Supplier Risk Evaluation Rating, D&B Credit Limit Recommendation, and D&B Rating.
The most important aspect of the D&B rating is your PAYDEX score which is calculated on a scale of 1-100 with 80 and above being considered good credit. This score is calculated by how timely you make your payments.
Experian Business Information Services:
The Experian scoring model for businesses is a statistically derived algorithm that calculates its score based on:
Credit- Number of trade experiences, balances outstanding, payment habits, credit utilization and trends over time.
Public Records- Recency, frequency and dollar amounts associated with liens, judgments or bankruptcies.
Demographic Information- Years on file, Standard Industrial Classification (SIC) code and business size.
Now that you know how business credit agencies score your business, lets dive into building a solid business credit profile with the following steps:
1. Incorporate your business as separate entity such as a LLC or S-Corp/C-Corp. Your business will then be given a Federal Tax Identification number much like a social security number for your business.
2. Make your business credible by filing the proper licenses, 411 listing, and any other documentation needed to do business legally in your industry and state. You will also want a proper website, business location, and an 800 number. Vendors and lenders will often do their due diligence before extending a business credit.
3. Select the proper SIC code for your business, this is also known as a business clarification code. Certain SIC codes can be seen as risky to lenders. Proper research of your industry is highly recommended.
4. Set up a company profile with Dun & Bradstreet. You will want to provide a clear picture with D&B on your business financials along with applying for a DUNs number.
5. Apply for Vendor Credit. Vendor accounts are typically based on a NET 30, 60, 90 day basis. This simply means you have 30 - 90 days to pay the balance owed in full. You can apply for vendor credit with companies like Quill and Uline. Make all of your payments 10-20 days ahead of time to reach a score of 90 or higher on the PAYDEX scoring model.
6. Once you have 5 reporting vendors on D&B you can apply for store credit with companies like DELL, Home Depot, and Office Depot. Store credit limits will usually not exceed your highest vendor account experience. Your business should have an 5 store credit accounts reporting to move to the next step.
7. Apply for Secured Credit Cards. Secured cards are matched with your deposit amount but can be increase with no additional deposit in 3-6 months. You should ideally have 3-4 Secured cards even if the limits are low.
8. You are now ready for no personal guarantee credit cards. There are many different institutions small and big that provide these cards but do not advertise them. You may have to do some digging or you can contact one of our advisers with questions.
Now for business owners that want to expedite this process, Trustart Financial offers many programs to build business credit and obtain funding in as little as 5 days.
Contact us today to learn more!