How To Establish Business Credit
Establishing corporate credit is sort of like getting your first job: the ultimate “chicken and egg” problem. Which comes first? If lenders favor businesses that already have credit, how do you obtain credit in the first place? Before long, the novice business owner starts to feel like he’s running on a treadmill that somehow never leads to usable financing. Can’t there just be a simple, clear-cut process for obtaining the credit your business needs?
Luckily, the answer is yes. Here’s how to go about the process:
Incorporate
It should go without saying, but you cannot obtain business credit as an individual. Sole proprietors are always judged as individuals by creditors. Therefore, if you are going to secure business credit of any kind, you must usually incorporate as one of the following entities:
- LLC
- S Corp
- C Corp
The reason is that when a lender or supplier grants business credit, they are granting it not to you, but to an entity: specifically, your business. The alternative to business credit is personal credit, which you likely do not want because it puts your personal assets within reach of creditors. With business credit, creditors can only target company assets in the event of non-payment. So, if you have not already, make sure to incorporate before seeking business credit.
Get a Dun & Bradstreet Profile For Your Business
If you have been denied business credit before, not having a Dun & Bradstreet profile could be to blame. Think of Dun & Bradstreet as being, roughly, a credit bureau for businesses. Just as Trans-Union, Experian and Equifax maintain credit data about consumers, Dun & Bradstreet serves as an information resource for business creditors. Using Dun & Bradstreet’s Credit Builder, you will get:
- A D-U-N-S® Number (if needed)
- A full credit profile called the Business Information Report
- An addition of up to 5 payment experiences to your credit profile, used by other companies to determine your ability to pay your bills
If you do not yet have payment experiences, it’s rather simple to get them. For example: if you have a business Internet connection, ask the ISP to report your successful monthly bill payments to your Dun & Bradstreet report. A sample Dun & Bradstreet report is available here. Getting one for your company will take about 30 days.
Boost Your Paydex Score
Another key indicator that creditors use in deciding whether to grant business credit is the Paydex Score of the business in question. In the same way that Dun & Bradstreet is the business equivalent of Equifax or Trans-Union, a Paydex Score is the business equivalent of the FICO score. It is basically your company’s credit score. And it operates in conjunction with Dun & Bradstreet, which defines Paydex as:
“D&B’s unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors“.
A Paydex Score of 80 or above is considered “very good” and is obtainable by having a pristine payment history with at least five vendors or suppliers. Note, again, that these payment histories do not necessarily need to be debt payments. If you consistently buy supplies or materials from a vendor (even if you pay cash) these successful, on-time payments can be reported to D&B and help boost your Paydex Score. Then, when you apply for business credit, your Paydex Score will be sufficiently high to please the creditor.
One Application at a Time
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A common mistake when pursuing business credit is applying to an excessive number of creditors at once. Doing this can get your company’s D&B credit file “flagged”, or marked as suspicious. Instead, simply begin applying, little by little, for the credit you need. Allow for a couple of weeks in between applications, and you will usually (provided your Paydex Score is high enough) start getting approved for credit.
Also: whenever possible, try to avoid applying for credit until your Paydex Score is, in fact, 80 or above. Applying beforehand can stick you with above-market interest rates on any credit you manage to get approved for.
Ask For Help
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When in doubt, call Dun & Bradstreet (or the creditor you are trying to work with) and ask for help. It is important to keep in mind that as mystifying as obtaining business credit can sometimes seem, creditors are not hiding from you. If your business is truly solvent and capable of repaying what it owes, creditors want to work with you. Don’t let the need to jump through a few procedural hoops distract you from the bigger picture.
If your business needs credit and can demonstrate its financial health via Dun & Bradstreet reports and a Paydex Score, most of the battle is already won!