Building Business Credit

If you are thinking about building business credit because you are having trouble weaning your contracting business off your personal credit card and home equity loan, you are in good company.

More than a quarter (27 percent) of non-employer firms cited credit availability as a challenge in 2017, making it the second most cited of five financial challenges, according to the 2018 Small Business Credit Survey of Nonemployer Firms conducted by the 12 Federal Reserve Banks.

The Fed defines nonemployer firms as small and young. Seven in 10 (71 percent) were five years old or younger, 39 percent worked as independent contractors or 1099 workers, 25 percent were sole proprietorships with no plans to hire and 25 percent were “potential employers,” meaning they had plans to hire employees in the next 12 months.

Of the nonemployers surveyed:

• 74 percent turned to personal funds to address those challenges.
• 65 percent of credit card holders reported using a personal credit card for business financing.
• 45 percent named credit cards as their primary source of business credit, compared to 27 percent who cited a loan or line of credit and 36 percent who used no external financing.
• 41 percent relied on the owner’s personal finances to fund their operations — more than twice the ratio of employer firms.
• Potential employers were significantly more likely to report subprime business credit scores than other nonemployers.
• Potential employers were most likely to be approved for any or all of the financing they applied for.
• 37 percent cited low credit scores as a reason for being denied credit.
• 34 percent cited insufficient credit history as a reason for being denied credit.

The good news here, believe it or not, is the last two bullet points. Why? Because while it may take longer and require different skills, you can build or repair your business credit score just like you can a house.

Business credit basics

If you don’t know what your business credit score is, ask a couple of your primary vendors which of the nearly three dozen business credit bureaus they report to, then contact them to find out how to get a copy of your report.

Chances are one of them will be Dun & Bradstreet (D&B), which issues the Paydex score based on payment information, or “trade references,” collected from tens of thousands of business suppliers and vendors worldwide over the past two years.

Most of the business credit bureaus use the same basic scoring range from one to 100. The higher the number the greater the likelihood that a business will pay its debts on time, according to a formula that weighs overdue debts, bills that have been sent to collections and on-time and early payments.

Business credit scores determine how much credit suppliers and lenders will extend you, as well as their terms and interest rates. A strong business credit score — generally anything 80 or higher — can help secure your first commercial loan. Experian, which reviews court records and other public filings, as well as payment behavior, says its average business credit score is 62, which certainly aligns with what’s described in the Fed’s Small Business Credit Survey.

A low business credit score can scare away not just creditors but potential customers and partners. That’s because credit reports serve as a kind of de facto resume in the business world.

Construction credit report

In 2015, a coalition of three West Coast companies began selling a construction credit report for $29.95 to help material suppliers, general contractors and project lenders perform due diligence on the customers and projects they supply with materials, labor or financing.

“The ability to confirm that contractors are licensed to execute the work they’re going to do, will pay their bills on time and are free of liens, judgments and the like all in one report was previously unheard of in my 35 years in business credit,” Southwest Business Credit Services President and CEO Rich Adams said at the time. “This report will help you determine the maximum dollar value your company should risk for any project that your customer is bidding on or that you plan to supply materials for.”

Resources

As you can see in the links above, there is plenty of free information available on how to build your business credit history, but here are a few more tips to get you started:

• Nav.com, which makes its money referring business borrowers to lenders, offers lots of good content in its Business Credit Scores & Reports section, as well as free access to some business credit reports. You can read the details of how Nav makes money here.
• D&B offers a seven-step guide to building business credit.
• Experian’s Business Credit Score Planner™ allows you to see how your credit score might change based on different scenarios. For instance, you can see how applying for or opening a new line of business credit, paying some bills 31 to 60 days late or having a trade debt sent to collections in the last seven years might affect your credit score.