While most people know a little bit about personal credit, very few understand anything about business credit.
Every day, I see countless people spreading false information about things like what lenders are looking for in underwriting, how to improve your business credit profile, and how creditors report it.
The latter is what we’re going to break down in this article.
If you want to leverage credit to operate and scale your business, you need to understand how your business credit gets reported. That information allows you to build a stronger profile, get approved for a higher credit limit, and access the capital you need.
Credit reporting entities
There are two elements at play here—your personal credit profile and your business credit profile, and both matter.
Your personal credit profile is how lenders determine your ability to repay a debt, so even though you’re applying for business credit, they will evaluate your personal profile first. It’s also important to note that virtually all business credit will require a personal guarantee, but your business credit will not report on your personal profile unless you default.
This is why it’s critical to have a clean personal credit profile with all three bureaus—a perfect payment history, less than 35% utilization, and a high score.
Then there’s your business credit profile, which matters, but not quite as much as your personal credit profile.
Experian and Dun & Bradstreet are the two most common business credit reporting agencies, and frankly, they’re the only ones you really need to worry about.
D&B was the first, with Experian being a relatively newer player in this industry, but both offer comprehensive business credit profiles. Some lenders may only use one or the other, while some may use both, so either way, both are important, just like how Equifax, Transunion, and Experian all matter for personal credit.
So it’s important to pull both your personal and business credit profiles, and make sure both are accurate. And this isn’t just when you’re applying—it’s critical to keep tabs on both profiles along the way to make sure your account information and payment history is being reported accurately. There are two reasons for this.
The first is that inaccurate reporting could cause your credit limits to be reduced and could even result in credit being pulled entirely.
The second is that it enables you to fix problems as they come up, before it becomes a major issue. A situation you never want to find yourself in is having your business grind to a halt because you’ve suddenly lost access to the essential capital you need to keep it running.
I recommend pulling your reports at least each quarter to keep tabs on what’s being reported.
Your business name & other data
You already know your business name is critical for branding, but did you know it’s also critical for getting business credit? Most people have no idea, and that limits how much they can get in funding.
There are certain words that lenders treat as either red or green flags, so if you’re just getting started, this is an opportunity to maximize your impact. We’ll address some of the red and green flags in your business name in an upcoming article.
The other area where your business name matters is in reporting.
Far too often, entrepreneurs will get sloppy when applying for business credit, and enter variations on their name from lender to lender. In some cases, you might even apply with a consistent name, but a technical glitch or a careless employee who works for the lender may still cause a variation. The end result is the same.
Below are some other factors that apply here:
- Address mismatches on credit report
- Business entity address mismatch on SOS and EIN/IRS documentation
- A business entity having a “virtual address” (These will always get a decline)
- Volatile industries: gambling, crypto, marijuanna, as examples (These will always get a decline)
- Problematic industries: transportation, trucking, auto-sales, etc. (These will often, but now always get a decline)
- Safe industries: Consulting, Real Estate, Marketing, etc. (These will more often get an approval)
- Current banking relationships matter more than ever before
- Having higher limits on your personal credit cards matters BUT not utilizing the cards to the full extent from time to time matters just as much
- AT THE TIME of the applications, having personal cards under 35% utilization ratios matters a lot
- Inquiries: Don’t have more than 3 inquiries within a 6 month time period, as measured on Experian. (You can have up to 5 on TransUnion and Equifax)
Business vs personal reporting
Lots of entrepreneurs make the mistake of using their personal credit cards, personal loans, HELOC, or other personal credit accounts that report to their personal credit to fund and scale their business. Essentially, they’re using personal credit in the way that business credit should be used. This affects their personal report utilization ratios, making it harder to get approved for personal and business credit alike.
You should avoid that at all costs because lenders for consumer credit follow a completely different scoring algorithm than lenders for business credit, and using personal credit the way most businesses need to may weaken your personal credit profile. On the other hand, that same behavior will strengthen your business credit profile.
You need to actively use your personal credit and ensure activity and payment history are reported, showing business creditors that you’re a reliable customer, but don’t overdo it. Remember, you need to keep your utilization below 35% on the personal side.
Legitimate business credit—that’s credit in your business name rather than your personal name, will report only on your business credit profile. There’s just one caveat here, which is that it will require a personal guarantee, so if you’re late or you default on a debt, it may then show up on your personal credit profile.
Now, this is where the most common question I hear comes in…
“What about business credit with no personal guarantee?”
Well, it does exist, but that’s something that most small businesses will not qualify for. This is generally reserved for companies that can prove revenue and have been in business for many years, not for startup businesses.
And keep in mind—it’s not enough just to get things right during the application process. You also need to regularly check that they’re continuing to report correctly. I recommend checking your statements each month and your personal and business credit profile each quarter.
Business credit account types
There are lots of companies that will offer you business credit, but they’re not all worthwhile.
That’s because while loans, credit cards, and lines of credit will almost always report on your business credit profile, certain types of credit accounts offer 30-120 day terms on their products, but they report to Dunn&Bradstreet, not to Experian business.
These are often known as Net 30, Net 60 or Net 120 accounts. Uline, Grainger, and Sams Club are good examples of this type of account.
Unfortunately, some companies promote these types of accounts as a way to “build” business credit, and in a sense they technically do that, but since they don’t give you access to any real capital, they’re not as useful for most entrepreneurs, unless you need to purchase items directly from those suppliers.
Business credit scoring
I mentioned earlier that personal and business credit profiles are scored differently. Understanding how they differ is key to building a strong credit profile that helps you get access to the capital your business needs.
When it comes to personal credit, you have to remember that it’s treated as consumer spending. So the more aggressively you leverage your personal credit, the weaker your credit profile will be. Carry a balance regularly that is more than a certain percentage of your limit, known as your utilization ratio, and you’ll typically see your score plummet.
When it comes to business credit, though, it’s treated more as investing, so they’re looking for evidence that you can produce a return on your investment with their capital. Maxing out a business credit card and paying it off over the next six months will actually improve your credit profile. A consistent pattern of this shows lenders you can be trusted with even more credit.