What do established companies looking to expand and start-ups in the earliest planning stages have in common? They want access to money and credit without having to provide a personal guarantee. This sentiment is consistently and strongly expressed by entrepreneurs I work with. It’s no secret that building and expanding a business credit profile has become a greater challenge over the last few years. Many established small companies’ cash flow sheets were hit hard during the recession and as a result, many lenders and suppliers have either added a personal guarantee policy or modified their current policy.
Most business owners know Experian, Equifax and TransUnion as the three major credit bureaus that provide information about their personal credit; however, they also may provide a credit profile about your company’s creditworthiness. Dun & Bradstreet (D&B) is the most well-known provider of business credit profiles among business owners because their business model serves them, whereas Experian, Equifax and TransUnion primarily exist for the benefit of creditors.
How can you build or expand your business credit? Theses six answers to common questions can help get you started.
Q. How can I avoid a lender pulling my personal credit report as part of a business loan qualification process?
A. This may sound obvious but ask the lender what is required to get a loan in your company’s name without a personal guarantee. When a lender has a personal guarantee policy, more than likely, you will not be able to get this policy waived. However, if you are doing business with a bank that you have an established relationship with, try to negotiate on the personal guarantee, at least in part. Generally, in order to qualify under a tax ID or DUNS number alone, typically, a company must already have a favorable and strong business credit history, positive cash flow, and in business for two or more years. Some lenders require five years. If you’re a new business and can’t qualify for capital without providing your Social Security number, then you may want to consider getting credit with a personal guarantee in order to begin to build your business credit profile.
Q. If I must personally guarantee a loan, will the account also be reported on my personal credit report?
A. No. Typically, business credit accounts will only be reported on your personal credit report if you, the guarantor, default on the account.
Q. I heard just because you get approved for business credit or a loan doesn’t guarantee the account will be reported to a business credit bureau. Is this true?
A. Unfortunately, this is true. Although most financial institutions report to a business credit bureau, don’t assume all lenders, suppliers and business credit card issuers will report your account to a business credit bureaus. Before completing an application ask which business credit bureaus they report to.
Q. I have established trade accounts that are not reported on any business credit report. Is there
anything I can do to get these suppliers to report my paying history?
A. Go to the credit bureau websites and start with a business search. If your company’s name is in their database, more than likely you have an established business credit profile. The only exception to this is Dun & Bradstreet (D&B). You can have an established business profile but no credit or trade accounts reported. Currently, TransUnion does not offer a business search. If you are absolutely sure your suppliers are not reporting to Equifax, Experian, TransUnion or (D&B) you have the option at a cost to add these suppliers to your D&B profile. If you opt for the D&B program make sure you completely understand how their service works.
Q. I have been approached about working with a company who sells trade references that will help my firm build on its business credit. Is this a good idea?
A. I recommend that you do not take any short cuts by working with companies that sell a trade reference. These companies who keep a very low profile will offer to sell a trade reference for say $1,000,000 and will then report favorably to the credit bureaus in exchange for a small fee, (typically 5% – 20% of the amount of the trade reference). This practice is illegal and should be avoided.
Q. How do business credit bureaus determine a credit score for a company?
A. Factors that influence a credit score can be slightly different for each credit bureau. Generally, a company’s payment performance greatly affects a score. For example, under a D&B model, the earlier you pay your creditors plus the more trade references reported in your credit profile will produce a higher D&B Paydex score. Other factors that influence a score can include information about your company’s structure, size, financials and number of employees.
Each lender and supplier has a different attitude towards risk. Deciding what type of loan or credit you need and honestly evaluating your situation can help you choose the right type of creditor. However, whomever you decide to do business with may want to pull both your business and personal credit reports.
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Lathea V. Morris is a credit consultant and small business trainer. She can be reached at MorlinoandLathea.com.
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