Do You Know What Your Business Credit Report Looks Like And How It Is Affecting Your Business?

Corporate Credit Reports: Why are They Necessary?

A corporate credit report is similar to an individual credit report. While individual credit reports are tied to an individual's social security number, a business credit report will be tied to a federal tax identification number (FIN) or an employer identification number (EIN). Both numbers may be obtained from the IRS. The business credit bureaus will record your company's business credit transactions to determine your company's ability to repay debt.

What is a Corporate Credit Report?

A corporate credit report may be obtained from: Dun & Bradstreet, Experian Business, Equifax Business and Business Credit USA. Business credit reports record if bills are paid, when they are paid, the amount of the loan or bill, the number of credit lines and credit cards, the number of inquiries made on the corporate credit report, and the length of time the credit profile has been in existence. The business FICO score is listed on the credit report and establishes the business's credit risk. Business credit scores range from 0 to 100. An excellent credit rating is considered 75 or more. This differs from a personal credit score. Personal credit scores range from 300 to 850. A score of 680 or higher is considered excellent.

Sending in information about business transactions is voluntary. Therefore, a business credit report may not reflect the company's true creditworthiness or ability to repay a loan. Companies that are using business credit reports to determine whether or not to extend credit may not be basing their decision on the complete picture.

Business Credit versus Personal Credit

Some business owners use personal information to apply for business credit. By doing this, they lower their personal credit score. Using personal credit for business doubles the number of inquiries on a credit report, as well as, the number of credit obligations. The more inquiries and credit obligations, the lower the score becomes. Personal credit should not be used for business credit. Instead, the business credit profile should be established to avoid damaging the owner's personal credit.

Forming a corporation or a limited liability corporation (LLC) will completely remove any ties to the owner's personal credit score. A sole proprietorship or partnership includes the owner's personal credit information and the person is personally liable for the debts incurred during the business. Personal assets may be lost as a result. A corporation or LLC will allow the business to operate separate from any personal debts accrued. Business credit may be established under a business's name without a personal credit check or guarantee. If any business loans or debt defaults, the owner's personal credit will not be affected and vice versa.

How to Improve Your Chance of Receiving Business Credit

Establish a business credit file by registering your company with the business credit bureaus. For business credit approval, companies should try to meet the requirements of the credit markets. To remain in compliance with the credit market:

1. Always pay your bills on time.
2. Pay off your loans in full by the pre-determined date.
3. Do not make more than four inquiries on your account within one year.
4. Do not let your debt to income ratio become unbalanced.
5. Do not have an exorbitant amount of credit lines. This may negatively affect your score.
6. Have a business license, if required.
7. Have a phone number.
8. Meet all local, state and federal requirements required of a business.
9. Remain in compliance within your corporation.
10. Prepare financial statements annually.
11. Prepare a business plan for lenders.

These simple items will help businesses establish good corporate credit. Lenders are more likely to extend credit to businesses that have a track record of paying bills and repaying debt owed. This will allow your company more flexibility to engage in the type of business activity that will accelerate your business.

How to Establish Business Credit

Companies that are just getting started should search for other companies that will extend credit without requiring a personal credit check or guarantee. If you are certain you will meet the obligations set forth in the agreement, ask the company to report your payment history to the credit bureaus. This will help your business establish credit and build a foundation for your company.

What to Expect when Viewing a Corporate Credit Report:

• Business Background Information: This information will tell the lender about the company and give the lender a framework to determine the company's ability to meet financial obligations.

• Comprehensive Financial Information: This information helps lenders determine the company's credit risk and current credit levels. The lender may use this information to decide the amount of the loan or the terms of the loan.

• Credit Risk Factors: Many companies review this information when the corporation becomes eligible for a credit increase. This will determine if the company's revenue will support a credit increase.

• Banking, Trade or Collection: This will give the lender perspective about the business practices based upon the company's past history.

• Past Liens, Judgments, Business Registrations and Bankruptcies: This information often precludes a lender from considering a business from receiving a loan. Most lenders will automatically decline an individual for credit, if the credit report contains any one of these items. Some companies will launch an investigation to determine if there were any extenuating circumstances involved.

• Uniform Commercial Code (UCC) Filings: This particular standing will compare the company's credit position to other credit positions to determine if the company can take on other credit obligations.

What Corporate Credit Scores Are Used For

Corporate credit scores will help businesses determine how much a business credit a lender or supplier will extend to a company. The score will also determine:

• The Amount of Interest on a Loan
• The Amount a Lending Institution will Lend
• The Amount of Business Insurance Premiums
• How Customers view Your Payment History
• Potential Investor Interest Levels

Since the company's ability to be financed are riding on the company's corporate credit scores, it is imperative to maintain a good to excellent credit score with businesses.