Posted: August 13, 2010

Establishing business credit: part 1

It's about more than just paying bills

By Keith McAslan

Personal credit building starts when an individual provides their social security number and applies for their first credit card. At that point a credit profile is started with the personal credit reporting agencies in the region of the country in which they reside.

This profile, also commonly known as a "credit report", is built with every credit inquiry, credit application submitted, change of address and job change. The information contained in the report is usually reported to the credit bureaus by those businesses issuing credit. Eventually, the credit report is viewed as a statement or report of an individual's ability to pay back a debt, and is the key tool to access and grant credit.

When a business issues another business credit, it's referred to as trade credit (credit from vendors or suppliers). Trade, or business, credit is the single largest source of lending in the world, but it typically not reported to the business credit agencies. The data regarding trade credit transactions must be submitted and then is accumulated by the business credit bureaus to create a business credit report using the business name, address and federal tax identification number (FIN).

The business credit bureaus use this data to generate a historical report about a company's business credit transactions and payment history. Typically, the businesses issuing credit rely on the business credit report to determine the credit they are willing to grant and the amount of the credit limit. Additionally, many businesses (suppliers/vendors) will submit credit reference applications to the key suppliers of the business as a method to obtain payment patterns as part of the credit granting process.

The major credit bureaus are:

• Dun & Bradstreet
• Business Credit USA
• Corporate Experian
• Small Business Equifax
• TransUnion (Personal)

The information provided to the business credit bureaus (primarily D&B) is sent in voluntarily, as businesses are not required to report. Therefore, credit bureaus may never receive any information about the business credit transactions and a business could go for years accumulating business credit without being reported to the credit bureaus and establishing a positive business credit history.

Establishing Business Credit History:
Business credit scores range on a scale from 0 to 100 with 75 or more considered an excellent rating. Personal credit scores, on the other hand, range from 300 to 850 with a score of 680 or higher considered excellent. With today's tighter credit scrutiny the higher the credit score, the more likely an individual or business is to obtain credit and at more favorable terms.
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While it is important to know that there are many factors (www.myfico.com ) that affect a credit score; it's based on more than just whether you pay your bills on time (still very important). The credit score will be affected by the amount of available credit you have on bank lines of credit and credit cards, the length of time you've had a credit profile, the number of inquiries made on your credit profile, paying the bills on time, bankruptcy, as well as other considerations.

The typical American consumer credit report receives two to three credit inquiries per year and usually has 11 credit obligations - typically broken down as 7 credit cards and 4 installment loans. Business owners are not your typical consumer, because they carry both personal and business credit. This typically doubles the number of inquiries made to their personal credit profile and the number of credit obligations they carry at any given time, all of which negatively impact the personal credit score.

Additionally, because business inquiries and personal inquiries are not separated on the personal credit report, the personal credit scores are negatively impacted. As mentioned earlier, using the personal credit history to get business credit, businesses are not able to build their business history/score, all of which could help attain critical business credit in the future.

A critical mistake many business owners make is using their personal information to apply for business credit, leases and loans. This practice has the resultant impact of potentially lowering their personal credit score, while not building a business credit history and business credit score.

A key to establishing a business credit profile and score is to find companies (UPS, FEDEX, etc.) or your key supplier and vendors that will grant credit for your business without using your personal credit information and then report the payment experiences to the business credit bureaus. By reporting the information to the proper credit bureaus, those companies will help the business establish a business credit profile and score.

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