As a business, it highly important that you have a good credit score to enable your suppliers to obtain insurance on their exports or sales to you, and to give you access to trade finance.
But what exactly is a credit score, and why does it matter?
A credit score is a visual indicator that tells others how well (or poorly!) you manage your business's finances. It is calculated from general company information such as size, but more importantly, it can take into account financial details such as your payment history and annual or quarterly revenues. This is essential information to lenders like banks because they’ll want to ensure that you’ll pay them back if they lend you money. In other words, a credit score is a numerical representation of how trustworthy your business is.
Good business credit is crucial because it is one of your most important tools for growing your business. Without it, you cannot secure a lease, an insurance policy, financing, credit or a loan. With a high credit score, not only can you qualify for all that, but you can also bargain more favourable terms with future suppliers, get lower insurance premiums, and pay lower interest rates on your loans.
But what if your business hasn't been operating for long, or if your current score leaves something to be desired? Well, that’s why we’re here! Our team has put their heads together to give you all the tips you need to build good business credit. Let’s dive in:
Incorporate Your Business
One of the first steps that you can take is incorporating your business. Incorporation will change your business structure from a sole proprietor or partnership into a corporation. By changing your company structure to an Inc. or Limited Liability Company (LTD, LLC, SARL, SAL, etc) you officially separate yourself from your business. Credit reporting agencies will now track you through your business's identity instead of your personal identity. This way, if you have personal bad credit, it may not affect your business credit score —and vice versa. Essentially your business becomes a separate entity from you.
Separate Your Expenses with a Business Bank Account
Opening a business bank account, credit card, and line of credit under your company's name will allow you to split your business expenses from your personal expenses.
A business checking account will also allow you to apply for a business credit card—which is vital, as it will permit credit bureaus to track your company's payment history. However, the business bank account and credit card must be only used for business purposes. That way, you can begin to build good credit for your business, by making regular purchases with vendors that report to credit bureaus or credit reference agencies, as trade suppliers, and then completing payment for those transactions within the agreed timeframe.
Bonus Tip: Using your business credit card to make payments for day-to-day, small business expenses is a great to way to quickly build up your credit score because they are easier to pay off than more significant transactions.
Obtain an Employer Identification Number (EIN) or Equivalent
Otherwise known as the Federal Tax Identification Number, the EIN is a nine-digit number given to US businesses by the Internal Revenue Service, and it is what allows other companies or government bodies to identify you as a business entity. Without an EIN, or whatever your local equivalent (the EU uses a Taxpayer Identification Number or Code), it will be challenging to build your credit history. Why? Because (at least in the US) you’ll be required to provide this number when opening a business bank account and when incorporating your business.
Once you have this, you will want to make sure that every time you apply for bank and credit products (like a line of credit) you’re using your EIN. The same is true when you are paying off orders from your suppliers. By paying everything off associated with your EIN in full and on time, you can quickly build a good credit score. In Middle Eastern countries, the Company Registration number would be a good identifier to use or you could look into registering for an LEI (Legal Entity Identifier) which is a new ISO standardised code aimed at bringing transparency to participants in the global financial market place.
Work with Vendors that Report Payment History
Most businesses will work with a third-party vendor (i.e. a supplier) at some point over the life of their business. In these types of business relationships, it is common for the vendor to provide you with goods or services upfront without immediately receiving payment. It is a credit-based relationship where you are billed via an invoice at a later point in time.
If you have good credit with your vendors, meaning you always pay them on time, then you will want to share this with as many credit reporting agencies as possible. Therefore, you will want to work with suppliers that have a policy of reporting payment histories to business credit bureaus and agencies. Not all vendors do this, so make sure to ask ahead of time; otherwise, you can't ensure that your timely payments will be reflected in your credit score. Cedar Rose has made this really easy for trade suppliers to do on their website by searching for your company and clicking Rate this Company next to the result. So, those who pay late without good reason will be held accountable, and it can affect their credit score.
Always Pay on Time. Or Even Better: Pay Vendors Early!
We cannot stress this enough: paying your debts on time is the most critical thing you can do to improve your credit score. By always paying on time, you show that you are dependable, and you can efficiently manage your debt.
How to Check Credit Score
If you wish to check your credit score or that of another business, then you don't need to look further than Cedar Rose. As part of our Business Credit Report service, we offer a free Cedar Rose Scorecard (CR Score) that uses innovative AI technology to instantly provide you with any company's credit score. Simply order a fresh report on your own company, and if you’re not happy with the results, contact us to see what data you could provide that might increase your score. For example, companies who can provide full financial information are more likely to score higher than those who don’t because they are generally seen as more trustworthy.
For more information on Business Credit Report Services, please visit our website at cedar-rose.com!