Business Credit Building
Why do businesses fail in building business credit the right way?
One of the major reasons why so many struggle establishing credit for the business effectively is because they don’t know what lenders define as a creditworthy business. In today’s post we’re going to put an end to all the confusion by covering five main areas that cause so many businesses to fail in the business credit building arena.
Take a look at these five key areas:
- Company payment history
- Depth of business credit
- Business credit utilization
- Business credit limits
- Types of business credit
Let’s explore each one.
Company Payment History
Paying the company’s invoices on time plays a major role in establishing a strong business credit report. Where countless business owners get it wrong is the lack of credit activity also known as credit usage. It hardly shows enough payment activity if all a company has is one or two paid invoices reporting on its business credit report.
So it’s key to use the credit your company has on a regular basis in order to develop a consistent track record of payment activity. Don’t focus on adding trade lines; instead focus on acquiring credit from vendors, suppliers and card issuers that provide the credit/products/services your company can use on a regular basis.
Depth of Business Credit
How long a business has been using credit is known as its depth of business credit. It’s an important indication for lenders and creditors to determine whether a business is a lending risk due to a history of late or missed payments. Think about this for a second, three months of credit history hardly shows enough history for a lender compared to a company with three or more years of credit history.
Unfortunately, many business owners fail to understand this basic fact which is similar to how personal credit worthiness is measured. Did you know the FICO® scoring model bases 15% of the score on length of credit history alone?
So how do you improve the depth of your company’s credit?
Other than time, you can add depth by adding existing trade references that don’t show up on your company’s credit file. For example, if you have years of payment history with a supplier that does not report to D&B you can add that credit history to your file through D&B’s trade reporting program. Now keep in mind, not all trade references are accepted under their paid service.
The following kinds of trade references are among those that are not accepted by D&B:
- Payments that have not yet been made but are anticipated
- Payments to businesses that have shared principals or some other type of legal ownership relationship
- Financial services: banks, credit unions, and insurance
- Bank references
- Utilities and gas companies
- Credit card companies
- Virtual offices
- Credit counseling or registered agents
- International companies
- Businesses with an unknown SIC
Note: Our Business Credit Building system contains a database of credit sources that do report to the business credit agencies.
Business Credit Utilization
Credit utilization is calculated based on your total outstanding balances compared with your total credit limits across all of your business credit accounts. You’re probably familiar with keeping below a 30% credit utilization ratio on personal credit cards. For building business credit, avoid over-utilizing your company’s available credit as well.
Where many business owners get it wrong is assuming that maxing out their available credit is fine as long as they pay off the balance in full each month. You have to remember that exceeding a 30% credit utilization ratio at any point in a billing cycle on any one business credit account may have a negative impact on your report. Ideally, make it a rule to keep your balances below 30% on all your company’s accounts at all times.
Business Credit Limits
How much credit your company is approved for speaks volumes to other vendors, lenders and creditors. For example, if your business has a revolving line of credit with a high credit limit, say $30,000, the stronger your company appears in the eyes of other lenders. The reason behind this is because lenders know the level of scrutiny your business has already undergone in order to get a credit limit approval from another bank.
Many business owners miss the mark on this one because they simply work on establishing several vendor accounts without understanding that the size of the company’s credit limits matter too. Remember, if you initially start out with a $500 net 30 account with a vendor work to increase the credit limit over time.
Types of Business Credit
The kind of credit a company has also known as diversity of credit, helps your business credit score and overall profile. Having only one type of credit, such as vendor credit, doesn’t hurt your report, but having a variety of types (business credit cards, fleet cards, installment loans, etc.) helps your score and profile tremendously.
Don’t make the mistake of acquiring one type of business credit, work on diversification such as revolving lines of credit (secured/unsecured), fleet credit, installment loans, etc.
Ready to build your business credit the right way? Become a member of my Business Credit Insiders Circle and gain access to a proven step-by-step business credit building system. A system that provides you access to vendor lines of credit, fleet cards, business credit cards with and without a PG, funding sources and lenders that report to all the major business credit bureaus. Submit your name and email below for details and receive a free business credit building audio seminar ($497 value) =>
To Your Success in Business and in Life!
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, Business.com, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.