Small Business Management – 4 Things To Know About Credit

March 10, 2016

If you have a business, at some point you’ll probably need credit just like you will need business insurance. You may need to make a large purchase, or you may need to finance the materials you need to grow your business. Here’s what you need to know about building business credit.

Apply for a D-U-N-S number

Establish a business credit file by applying for a D-U-N-S® number with Dun & Bradstreet. The D-U-N-S number is an identifier that is unique to each location of your business, and it is used to identify your business credit profile. D-U-N-S stands for Data Universal Numbering System. To apply for a D-U-N-S number, go here. If you already have a business credit file, check to see what it includes. You can do this on the Dun & Bradstreet website as well. If there is information in your file that is incorrect, you can correct it.

Start to build business credit

Establish credit in the name of your business. Open a commercial checking account and get a credit card in the name of the business. Use this card—not your personal credit card—when you are purchasing items for your business. Not only will this help you build credit for your business, it will make it much easier to track your business expenses if you use that credit card for everything. Be sure to pay off your balance each month. If you need to make a large purchase that you won’t be able to pay off right away, make sure you make monthly payments on time. And try to pay more than the minimum amount due each month so you can pay off your balance sooner.

Applying for credit

If you know you will need credit for a major purchase, plan ahead for it. Before you apply, make sure all of your accounts are up to date. Check your business credit report and correct any mistakes or omissions. Don’t exhaust all your other resources before you apply for credit. You should have some money in the bank and your existing credit cards or credit lines should not be maxed out.  Consider these two companies applying for a loan to purchase a large piece of equipment.

  • Company A has had an average daily balance of $20,000 in business checking for the past six months. The company has a business credit card with a limit of $10,000. Currently there is a $2,500 balance on the card.
  • Company B has had an average daily balance of $4500 in business checking for the past six months, and has accessed the overdraft protection on the account three times. The company’s business credit card has a $9,800 balance and a $10,000 limit.

A lender will consider Company A to be a far better credit risk, because they have a little ‘wiggle room.’ If they see an unexpected spike in expenses or decline in revenues, they have the ability to ride out the storm. Company B does not. The temptation may be to wait as long as possible to apply for a loan or line of credit, but waiting too long may jeopardize your chances for approval or subject you to a higher interest rate.

What kind of credit?

When applying for business credit, you have two choices: a loan or a line of credit. A loan is a lump sum of money you receive when the loan closes. You pay it back over time, with interest. The interest rate is usually fixed, so your payments are the same every month. A line of credit is money that is available to you when you need it. You withdraw from it as you need cash, and you pay it back based on the amount you have outstanding. The best choice will depend on what you are going to do with the money. If you need to purchase a large piece of equipment or do renovations to your location, a loan may be best. If you need cash for operating expenses or materials, consider a line of credit. With the line of credit, you only pay for the money you are using. When you make payments on your line of credit, the principle payment goes back into the loan for you to use again if you need it. Managing credit properly is a key component to managing your business. Understanding how to use it will help you grow your business the right way.