Managing Your Business Credit
Whether it's to purchase inventory and equipment, manage cash flow or handle the unexpected emergency, ready access to an ample amount of credit is vital for any business. And the ability to get the credit you need from lenders and suppliers requires careful management.
Five Simple Steps
Establishing and building your business credit history and credit-worthiness isn't complicated. Here are five simple steps to get you started:
Establish a Business Credit File
Start by determining if you have a business credit file with Dun and Bradstreet (D&B). You may also call D&B customer service at 866-785-0430.
If you don’t have a business credit file, establish one by applying for a D-U-N-S® Number. Small businesses should apply for a D-U-N-S® Number, a unique business identification number, as soon as they start their enterprise to start the process of creating a business credit file.
If you already have a business credit file, review it completely. Add or modify the information as necessary to ensure that anyone looking at your business credit (such as vendors, suppliers and financial institutions) are making decisions based on complete and accurate information.
Establish a Business Credit History
When they are starting up, it's common for entrepreneurs to use their personal credit and finances to get their business going. That may be unavoidable, but it's important to begin establishing a business credit history by putting expenses (such as a business phone line) in the company's name and using a commercial bank account to pay bills.
Pay Bills on Time
It's important to understand the factors that influence your credit rating. The foundation of a good commercial credit score is a positive payment history. The most important thing to do is pay your bills on time. Be very careful not to overextend your business, and use any line of credit judiciously. While payment behavior is important, credit ratings are also based on several other factors. D&B, for example, maintains 150 factors that go into a credit rating, such as industry, revenues and number of employees.
Monitor Your Business Credit File
And keep it up to date. According to D&B, the credit score of about one in three businesses declines over just a three-month period. By monitoring your business credit file, you will be aware of any change in your ratings before it affects your relationships with customers, suppliers and financial institutions. You should keep your credit file current and accurate, reflecting changes such as location, number of employees, outstanding suits/liens and revenue - all of which impact your credit rating.
Monitor Customer and Vendor Credit
Monitoring credit reports that provide a clear and complete picture of the credit standing of your customers can help you to determine how much credit, and on what terms, you should extend.
Why Manage Business Credit?
Small business owners are entrepreneurs. They are successful because of their ideas, their passion, their drive. But they generally aren’t accountants, and as a result they are often unaware of just how important actively managing business credit is to their success.
Small business owners agree that cash flow management is one of their top concerns. Actively managing business credit can help small businesses ensure positive cash flow by:
Securing Financing at Better Terms
Good credit can ensure that small businesses get financing when they need it. According to the SBA, insufficient or delayed financing is the second most common reason for business failure. And, since most loan decisions below $100,000 are automated, the business credit file will often dictate the amount and terms of a loan. For businesses with poor credit ratings, top national banks may substantially increase credit card and loan interest rates.
Ensuring Supplies and Inventory
Suppliers evaluate your credit and make decisions about how much credit to extend to you – perhaps a $30K credit line could have been $60K with a stronger business credit file. Good business credit can ensure that you get the supplies you need under the best possible terms, freeing up more money for your business.
Extending Credit to Customers
Knowing the credit of customers enables small businesses to provide better terms to creditworthy customers and avoid doing business with customers who pay slowly – both of which can lead to improved cash flow.
Protecting Against Identity Theft
Actively managing your business credit file helps you ensure that fraudulent or incorrect information is not in the file. 15-30% of all commercial credit losses are due to fraudulent activity. It’s important that your business credit file truly reflects how good your credit is, and that you are aware of any inaccuracies and missing data so you can address them promptly.
Consultants at our Small Business Assistance Office can help you understand more about managing business credit. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our publication A Guide to Starting a Business in Minnesota provides a deeper look at this and other issues.