Delicious old-fashioned donuts are on display behind Nasima Rahman, who stands at the counter of Sesame Donuts, greeting her morning rush of customers with a warm smile. “My wife throws in extra donut holes,” says Mohammed Rahman, her husband, “because making people happy is very important to us.” This emphasis on customer service has led to a quickly growing small business, and recently Rahman has been courted with offers for ample new credit lines, far more than the business needs. In fact, Rahman completely self-financed the business, so how did the credit for Sesame Donuts get to be so good?
Small businesses have credit scores apart from the personal credit ratings of the owners based on as many as 150 different factors in addition to information that is submitted voluntarily. The score can vary vastly from the personal credit rating of the principal, something that can come as a bit of a shock to the small business owner who has worked hard to guard a sterling personal credit rating, but gets denied business credit seemingly without cause. The business credit score will influence things such as credit approval, financing costs, credit card interest rates, insurance premiums, rental terms, and terms from suppliers.
The business credit score works in a similar way to the personal credit score system, but with a range of 0 to 100 points instead of 350 to 850. On that scale, 75 is considered good. Understanding how business credit is established and tracked is the first step to improving your business credit rating. Let’s take a look at five simple ways to build business credit.
1. Establish a business credit history
One way to establish a credit history is to set up a commercial bank account to pay bills. Put expenses, such as the business telephone line, in the name of the company and use the business checking account to pay the bill each month.
“A company is only as strong as its banking relationships,” says business consultant and author Martin O’Neill in his book Building Business Value. Getting started with a business bank account helps to build an important foundation for future conversations. Don’t wait until the business needs money to build a banking relationship.
One of the first things that Rahman did as a small business owner was get an employer identification number (EIN) from the Internal Revenue Service. “It was very easy, I went to the website and filled out a form,” he says. He also registered his business and “doing business as” (DBA) name with the state of Oregon and paid for the business license. He then opened a business bank account for Sesame Donuts.
2. Register your company with business credit bureaus.
With an EIN and a business bank account, a business credit profile that’s separate from personal debts is established. However, if the business is a sole proprietorship or partnership, the business owner is personally liable for the debts of the business and all personal assets are at risk in the event of litigation. Because of this, as a sole proprietor or partner, personal credit information could still be included on the business credit report and vice-versa.
Dun & Bradstreet, Experian, and Equifax USA are three of the major credit reporting agencies that compile business credit reports. Register online, for example, by getting a D-U-N-S number with Dun & Bradstreet, which will help to quickly establish a business credit file.
3. Pay bills on time
In addition to an EIN, separate bank account, separate phone number, and a D-U-N-S number, vendor accounts and a credit card will help to establish the credit for the business separately from the individual.
Rahman uses a Costco business credit card to purchase supplies and holds two other business credit cards. The best way to build or improve commercial credit scores is positive payment history, which means making regular payments on time.
4. Monitor the business credit file and keep it up to date
Payment history is important, but credit ratings are based on multiple factors such as the industry the business is in, company revenues, and number of employees. Actively manage the file by keeping financial records and updating the credit profile to reflect any changes that occur. Maintaining a file that is current and accurate will help to guard against identity theft as well. According to Dun & Bradstreet, 15 to 30 percent of all commercial credit losses are due to fraudulent activity.
5. Comply with the business credit provider requirements.
The business credit market has its own set of requirements and businesses seeking credit approval must be in compliance. Overlooking simple things such as obtaining a business license or failure to have a telephone line can raise red flags with credit bureaus, so take the necessary steps to set up the company properly in compliance with local, state, and federal regulations. The list of business credit market requirements can be found online at iBank.com.
At this point, Rahman says, Sesame Donuts is making a small profit and they are happy with that, not wanting more. The customers are happy and they enjoy a good reputation in the community. Knowing that his business credit is good is a feather in his cap, and a sign of success won through hard work and careful financial management.
Building Business Value, by Martin O’Neill, 2009
Guide to Credit and Bankruptcy, The American Bar Association, 2009
Legal Guide for Small Business, The American Bar Association, 2010
Dun & Bradstreet
Entrepreneur.com: “The ABC’s of Business Credit,” by David Gass
Equifax USA: http://www.equifax.com/home/en_us
Federal Trade Commission: “Getting Business Credit” http://business.ftc.gov/documents/alt043-getting-business-credit
Internal Revenue Service: Employer ID Numbers http://www.irs.gov/businesses/small/article/0,,id=98350,00.html
U.S. Small Business Administration: “Why small businesses should manage their business credit” http://www.sba.gov/sites/default/files/oee_5_simplesteps_brochure_managing_your_credit.pdf