What Exactly Is Meant by "Business Credit"?

What Exactly Is Meant by

Definition

Credit for businesses is a record of a company’s financial history that shows it can pay back loans and other financial obligations.

Lenders are able to utilize it to evaluate an applicant company’s viability as a candidate for a certain loan product. Credit for businesses works the same way it does for people. It is based on how well a business has paid its bills in the past and how much debt it has. This shows potential lenders how well the business meets its financial obligations.

Let’s go into business credit in greater detail, including the ways in which you might benefit from improving your company’s credit standing.

The Concept of Business Credit, Along with Some Examples

Personal credit is an assessment of a person’s risk, and corporate credit is an assessment of a company’s ability to pay back a loan or other financial obligations.

A credit report for a company will include a credit score that is calculated using the company’s payment history, the amount of debt it has, and how much of its available credit has been used, in addition to general information about the company and information that can be found in public records.

When your company wants to borrow money from a lender, a reference will be made to your company’s business credit, which operates independently from the personal credit profile of the business owner.

For instance, if your company requires additional working capital in order to keep its operations running, you may want to investigate the possibility of obtaining a cash flow loan. As part of the process for applying for this loan, potential lenders will look into your business’s credit history to find out how well it is doing financially.

This is analogous to the process that an individual would go through in order to apply for a personal loan. On the other hand, the loan would be provided to the company itself and would be based on its credit history.

Experian, Equifax, and TransUnion are the three primary credit bureaus that are responsible for compiling individual credit reports. In most cases, they range anywhere from 300 to 850. 

A company credit score, on the other hand, has a different scale, typically ranging from one to one hundred points. These credit bureaus include it in their reports: 

  • Experian Commercial
  • Equifax Small Business Services
  • Dun & Bradstreet

You will need to create an account with Dun & Bradstreet in order to obtain a copy of your company’s credit report from that organization. After registering, a one-of-a-kind D-U-N-S Number will be generated for you, which lenders can then refer to.

How Credit Is Granted to Businesses

It’s important to understand how business credit works, whether you’re actively looking for a loan or still trying to get your business off the ground.

Learning how to establish credit for your company at an early stage might help provide you with more possibilities for obtaining financial support. You might also find it easier to keep your personal credit and financial obligations separate from those of your business.

Companies that are recognized under the law as distinct organizations, such as limited liability companies (LLCs) or corporations, are eligible to build their own lines of credit for their enterprises. When it comes to applying for loans and filing tax returns, an employer identification number (EIN) serves a similar purpose to that of a Social Security number. 

The company operates as its own distinct legal entity and may be recognized by using this number. 

Setting up business credit can be helpful if you want to keep a wall between your personal and business expenses.

You will need to create an account with Dun & Bradstreet in order to obtain a copy of your company’s credit report from that organization. After registering, a one-of-a-kind D-U-N-S Number will be generated for you, which lenders can then refer to.

Developing Credit for Your Company

The flexibility to negotiate contracts and reduced interest rates are just two of the numerous advantages that come from maintaining a solid credit score for your company. Other advantages include having a better chance of being approved for loans.

Building up your company’s credit history should be approached in the same way that you would approach your own personal credit history if you want to see positive results in terms of your company’s credit score. There are a few actions you might take in the event that you do not currently have an established credit history. 

Be sure to register your business so that the law can see it as a separate entity, like a limited liability company (LLC) or a corporation. You can fill out credit application forms if you have an Employment Identification Number (EIN), which you can get from the Internal Revenue Service.

You should have a bank account in the name of your company so that you can use it for doing business transactions. This will make it easier to keep your personal and business funds separate, as the bank account will be in the name of the company.

You will need to apply for credit in order to get your credit history started, and this could be in the form of a small business loan or a company credit card. Keep an eye on the credit report and score assigned to your company.

Credit Options for Businesses of All Sizes

Your company has access to a number of different opportunities that can help it develop or improve its credit. The following are some examples of the various kinds of credit available to businesses:

Credit Cards for Businesses: Similar to personal credit cards, credit cards for businesses come with a credit limit and have available money that must be repaid at the end of each billing cycle. This makes it a simple and convenient way to start establishing credit for a firm.

A Credit Line: A credit line functions very similarly to a credit card in that it makes a certain amount of money readily available for usage at any one time. You are only responsible for paying interest on the amount of the credit that you actually use.

A Term Loan: A term loan is the most common and traditional type of loan that a bank or other lender will provide to a business. This type of loan enables the company to borrow a quantity of money and make payments over time.

Businesses have the ability to make purchases of items or services by using vendor credit, which allows them to finance the cost of the transactions.

If your company pays its own utilities and other bills, such as internet and phone lines, your company may be eligible for service credit.

Key Takeaways

Credit for businesses is a measurement of a company’s creditworthiness, or its capacity to repay debts and is based on the company’s credit history as well as other criteria.

Business credit allows a company to build its own creditworthiness rating by insulating the company from the financial commitments and responsibilities that come with being a business owner.

The procedure for establishing company credit is comparable to that for establishing personal credit. However, business credit is typically assessed on a scale that ranges from one to one hundred.

To build business credit, you have to meet a number of requirements, such as registering your business as a separate legal entity and asking the Internal Revenue Service (IRS) for an employer identification number (EIN).

Leave a Reply