Building Business Credit for Small Business
Get an 80 paydex score and your business will be able to qualify for all the credit it needs. 
Have you ever heard that statement before?
It’s by far the most misleading and misguided advice circulating the industry and unfortunately too many small business owners are buying into this misinformation.
In this post let’s shed some light on this very issue so you can gain a much better understanding of what to expect during the credit granting process.
Click to continue …
There’s been quite a stir on the integration of FICO® 08 which is the credit scoring system used by the majority of lenders to determine a consumer’s credit worthiness. Similar to your personal credit ratings, businesses and corporations also have business credit ratings that potential lenders use to determine its credit worthiness.
Unlike a personal credit rating, there is no designated standard for determining the credit worthiness of businesses. However, the main tool used to determine and establish company credit ratings is D&B’s PAYDEX system.
Where a personal FICO® score is based only on credit history that includes information on how much a person borrows and how well they repay loans, a credit rating for a business takes into consideration company size as determined by assets and number of employees.
Where personal credit ratings are based on financial information provided by credit card companies, retail establishments, and financial institutions, a business credit report and rating is determined by information supplied by the business owner and gathered from vendors, suppliers, and other trade accounts.
For this reason, potential lenders may be different from one another in their evaluation of a business’ credit history by emphasizing certain qualifications more than others.
Like most industries, there is a specialized language involved with business credit reports and ratings.
The following is a list of some of the most common concepts and terms as well as their definitions:
Average High Credit / Highest Credit
In order to put a business’s credit in perspective, these are based on the total amount of credit owed as compared to the industry as a whole.
Business in Good Standing
Includes any problems with the business overall.
Commercial Credit Score
A D&B prediction regarding the chances of an account becoming severely delinquent within one year.
Comprehensive Report
This is a combination of several D&B business credit reports that paints a more complete picture of the company’s credit history. It includes the results of the PAYDEX analysis, a company’s credit score and Financial Stress class, as well as any public filings or liens, the business’s history and operations (including when it filed for incorporation, annual financial statements, facilities, affiliations, and number of employees).
Credit Score Class
This is part of the D&B assessment that gauges payment habits to determine how likely it is that a potential account will be delinquent in the next 12 months. The scoring can range from 1 to 5 with 1 being the score assigned for the lowest risk and 5 for the highest.
Financial Stress Score
This is part of the D&B assessment that analyzes the Financial Stress that a business is experiencing in order to predict how likely it is that a business will fail in the next 12 months.
PAYDEX
This is D&B’s primary assessment that analyzes how likely it is that a company will make its future payments on time. An 80 paydex score for a business can be compared to having a 720 personal credit score.
Sample business credit reports:
Dun & Bradstreet business information report sample
Dun & Bradstreet enhanced comprehensive report sample
Dun & Bradstreet Credit eValuator Plus Report sample
Corporate Experian Business Credit Score Report sample
Small Business Equifax Commercial Credit Report sample
To order business credit reports:
Equifax Small Business Enterprise
Experian SmartBusinessReportsTM
Every business will at one point require an influx of cash in order to cover operating expenses, expansion costs, legal fees, inventory or a range of other items the business may require in order to operate. The worst mistake you can make is seeking funding when your business needs it most. Lenders extend cash credit lines to businesses that don’t need the capital and have strong business credit ratings. Start digging your well before your business gets thirsty!
Are you ready to start building your business ratings? 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 premium vendors, business credit cards, 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 audio seminar ($597 value) =>
About the Author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. A business credit solutions membership helping business owners build small business credit. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
Recently I shared the benefits of building business credit with each of the business credit agencies. Separation of personal and business credit is a must for small business owners in order to eliminate personal liability and protect the integrity of the corporate veil.
While this strategy creates a Paydex, Small Business Credit Risk Score, and Intelliscore for your business it’s not the only rating you should pay close attention to.
Your business will also need to establish effective ‘Bank Credit’.
Bank credit is totally separate from building business credit and in no way affects your ability to build strong business credit scores.
“Bank Credit” makes your business more credible in the eyes of lenders. In this post, I want to share with you the ‘3 Main Components of Building Bank Credit’ which are:
So let’s get started!
Business Bank Account
The first step in establishing positive bank credit is to make sure that your business name and mailing address, as listed on your business bank account, matches exactly how your business name and address appear on any legal paperwork that’s been filed with the State. It must also match exactly with the name and address that appear on your Federal EIN paperwork. If it doesn’t match you’ll have to correct it immediately!
Business Bank History
Most lenders also determine the age of your business by the date you first opened your business bank account and not the date that appears on your Incorporation, LLC, or EIN paperwork. However, in some instances banks may also require 24 months seasoning from the start date of your business as well.
Your business banking history is vital to your ability of being able to secure larger business loans with banks. Lenders will look to see how long that relationship has been established, so once you get your account set-up don’t change banks!
The longer your business banking history, the better the borrowing potential you have.
Bank Rating Number
Your business bank account reflects how you manage your cash flow. Lenders want to know that your business cash flow is capable of handling the business debt and expenses on a consistent basis. Bank accounts with low average daily balances, or that show many NSF returned checks, can get your business loan applications declined right away.
If a loan amount requires a $1,000 month payments then lenders need to see at least a “Low 5” bank rating. Your “Bank Rating” is based on your average daily minimum balance over the last 3 months.
|
Bank Rating |
Account Balance |
|
Bank Rating |
Account Balance |
|
Low 4 |
$1,000 – $3,999 |
|
Low 5 |
$10,000 – $39,999 |
|
Mid 4 |
$4,000 – $6,999 |
|
Mid 5 |
$40,000 – $69,999 |
|
High 4 |
$7,000 – $9,999 |
|
High 5 |
$70,000 – $99,999 |
1. The first factor is your balance rating. This rating is your average minimum balance maintained in your account over a three (3) month period. $10,000 will rate as “Low 5”, $5,000 rates as “Mid 4”, $999 rates as “High 3”, and so on. You need to maintain a minimum “Low 5” bank rating ($10,000) for at least 3 months. Unfortunately, without at least a “low 5” rating, most lenders will assume your business has little ability to repay.
2. The second factor is the bank rating cycle which is three (3) months. You’ll want to have at least a low 5 for the three months prior to applying for larger loans.
3. The third and final factor has to do with how you manage the account. NSF (bounced) checks destroy bank ratings. From this point forward, NSF checks are something you can’t let happen. I would suggest that you add overdraft protection to your account as soon as possible.
Obtaining Your First Business Bank Loan
Getting your first business loan from a bank can seem like an impossible task. The majority of the business loan applications at banks get declined because banks won’t lend to just anybody … or will they?
This one business bank loan strategy provides a powerful boost to building business credit fast. The business bank loan needs to be in the exact name of your company. It should be under your Federal EIN and report to the business credit agencies, specifically Equifax Small Business and Corporate Experian.*
So how do you accomplish this? Under this Bank Loan Program you will be securing a business loan with a certificate of deposit (CD) at the bank that is extending the business loan. You’ll make a deposit into a CD account at an SBA preferred lending bank. Then, you receive a business loan for 100% of the value of the CD.
This process works very well and works every time as long as you’re personal credit scores are not in the low 500 range. If your scores are in the low 500’s, it’s best to try smaller business banks and talk to an individual banker first.
The Benefits of a Secured Bank Loan
If you’re personal credit is a large issue and you just can’t find a business bank to do the CD program for you … don’t worry. You can still build your business credit without the bank loan; the bank loan just makes it faster.
*N.E.C. members are provided access to our list of banks who have done the CD-Secured Business Loan program
Remember – The secret of business is to know something that nobody else knows. ~ Aristotle Onassis
Marco Carbajo
About the Author
Marco Carbajo is a business credit specialist, author, speaker, and founder of http://www.startbusinesscredit.com . Want to learn more about how to build business credit and obtain unlimited financing for your business? Claim Marco’s popular FREE business credit seminar ($597 Value), available by simply submitting your email below =>
