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Articles

How to build business credit

How to build business credit
September 18, 2021

Monitoring your business’s financial health is an essential part of running your business. Business credit is a key component of your business’s financial health. Your business credit score reflects how well you are able to meet financial obligations, such as paying bills and invoices on time.

Building business credit can improve your borrowing power and help you secure better financing and trade credit. It can also help you secure better repayment options with lenders, suppliers, and vendors. A simple way to monitor and build your business credit health is by signing up for the Equifax Small Business Grade.

Although there are ways to get business financing with low credit, building your business credit will help set you up for long-term growth and success. If you’re looking for more information about building your business credit, we’ve got you covered. In this how-to guide, we’ll answer the following questions:

  • What is business credit?
  • Why is business credit important?
  • How are personal and business credit different?
  • Where can you find your business credit report?
  • What factors impact your business credit score?
  • How can you build your business credit score?

What is business credit?

Business credit is an indicator of your business’s creditworthiness. It shows how suitable your business is to receive financial credit based on how financially risky your business is. Your business credit score demonstrates your business’s ability to repay debts on time. This is often what lenders, suppliers, and other vendors look at when working with you and your business.

Credit agencies such as Equifax Canada and TransUnion Canada produce business credit scores and reports for Canadian business owners. Each bureau has unique calculation methods and different scores used to display your overall business credit. TransUnion provides a business credit risk score that ranges from 400 (poor) to 800 (excellent). Equifax provides four detailed scores, each with different numeric ranges.

Why is business credit important?

Building your business credit is important because it can help you:

  • Obtain business financing quicker and easier
  • Secure better trade credit and repayment terms with suppliers
  • Protect your personal credit and your personal credit score

Obtain business financing

Having good business credit is beneficial when you need financing to help you manage your business cash flow. Lenders may look at your business credit score when you apply for financing or other credit from them. A high business credit score will make it easier for you to get approved for a small business loan, a business line of credit, or other types of small business financing. Lenders may also provide you with lower interest rates on business financing if your business credit score is strong.

Secure better credit and repayment terms with suppliers

A higher business credit score can also help you get trade credit and secure better repayment terms with your vendors and suppliers. With a strong business credit score, they’ll view you as a trustworthy client and may provide you with more flexible repayment structures. This is beneficial when you need to buy equipment, stock up on inventory, or make other major purchases for your business. Selecting the right supplier for your business can also help you secure more favorable repayment terms based on your specific needs.

Protect your personal credit score

Business credit is also important for protecting your personal credit. As a rule of thumb, you should avoid using personal credit for business expenses and purchases. Incurring large business expenses with your personal credit will increase your credit utilization ratio, which measures how much credit you are using in relation to your credit limit. High credit utilization has a negative impact on your personal credit score.

How are personal credit and business credit different?

Although similar on the surface, personal credit and business credit are different in many ways. Some of these differences include:

  • What your business credit score is used for
  • What your business credit score looks like
  • How your business credit score is calculated
  • What your business credit report looks like
  • Who can access your business credit report

What your business credit score is used for

Personal credit is based on your personal financial history and demonstrates how reliable you are with your personal finances. Your personal credit score indicates to lenders how likely you are to pay your bills on time. A good personal credit score helps you qualify for financial products such as personal credit cards, car loans, and student loans.

In comparison, business credit is directly tied to your business’s financial history. Your business credit score demonstrates whether your business is a good candidate to lend money to or do business with. Your business credit score indicates to lenders, suppliers, and other vendors how likely you are to pay your business-related invoices and bills on time. A good business credit score helps you qualify for business loans, lines of credit, and trade credit from lenders and suppliers. It can also help you secure low-rate business loans and more favourable repayment terms.

What your business credit score looks like

Personal credit scores range typically range between 300 and 850. This range may differ between credit bureaus. The higher your score, the lower amount of financial risk you pose for lenders. By improving your personal credit, you want to get your personal credit score as close to 850 as possible.

On the other hand, business credit scores in Canada vary between the two main credit bureaus. TransUnion’s business credit risk score ranges from 400 (poor) to 800 (excellent). Equifax provides four separate scores that each provide specific information:

  • Credit Information (CI): This score is a general measurement of your commercial credit file as it relates to delinquency, and ranges from 0 to 70. A low value indicates good credit history, while a high value indicates bad credit history.
  • Payment Index (PI): This score is a measurement of your business’s payment habits, and ranges from 0 to 99. The closer your score is to 0, the better your business is at paying creditors on time.
  • Commercial Delinquency Score (CDS): This score predicts your business’s likelihood of severe delinquency, and ranges from 101 to 662. The higher your score, the less likely your business is to be delinquent.
  • Business Failure Risk Score (BFRS): This score predicts your business’s likelihood to cease operations within the next year, and ranges from 1001 to 1722. The higher your score, the less likely your business is to fail.

How your business credit score is calculated

Canada’s national credit reporting agencies, Equifax and TransUnion, each calculate personal credit scores in slightly different ways. Each credit bureau has multiple scoring algorithms, which is why you might see a different personal credit score reported by each bureau. In general though, the main factors that they use to calculate your personal credit score are:

  • Payment history
  • Used credit vs. available credit
  • Credit history
  • Public records
  • Credit inquiries

In comparison, Equifax and TransUnion calculate your business credit score using a wide range of traits about your business and its financial history. Again, each credit bureau has its own scoring algorithms and calculates your score in slightly different ways. Variables used to calculate your business credit score include:

  • Payment history
  • Collections
  • Lawsuits, liens, and judgments
  • Credit utilization
  • Public records
  • Company size
  • Industry risk

Although many of these factors are similar to those that impact your personal score, some are unique to business credit scores.

What your business credit report looks like

Your personal credit report, which you can access from Equifax or TransUnion, includes four main types of information:

  1. Identifying information: This includes your name, date of birth, current and previous addresses, Social Insurance Number, telephone number, and current and previous employers
  2. Credit accounts and history: This includes information about trade lines (such as credit cards, mortgages, car loans, or other lines of credit) that you’ve established with lenders; credit limits, account balances, and payment history are all included here
  3. Inquiry information: This includes information about companies who have pulled a copy of your report
  4. Public records: This includes items that may impact your credit worthiness, such as bankruptcies, collections, and judgments

In contrast, your business credit report is much more comprehensive and may look different depending on which credit bureau your report is from. Equifax’s business credit report includes the following details:

  1. Business information: This includes your business name, address, incorporation information, employee size, and sales volume
  2. Score summary: This section summarizes the financial risks your business may pose for lenders and suppliers, including how likely it is that your business will pay bills on time and how likely it is that your business will be delinquent
  3. Report highlights and alerts: This section summarizes your business credit accounts, balances, and limits, along with any late payments or legal items that are on your business credit file
  4. Industry trade details: This includes information about trade credit accounts you have open with suppliers, such as number of accounts, balances, repayment term details, and total amounts past due
  5. Banking report details: This includes information about financing accounts you have open with banks, such as number of accounts, types of accounts, balances, loan details, and total amounts past due
  6. Collection details: This includes information reported by third-party collection agencies regarding your business, such as collection claims reported, the creditors who have initiated claims against your business, the amount of each claim, the amount paid by your business, and remaining balances
  7. Legal details: This includes information on legal suits and judgments that have been filed against your business, along with other legal information about your business
  8. Inquiry details: This section provides a list of recent inquiries that have been requested on your business within the last 24 months

As you can see, your business credit report has a wealth of useful information that can be used to assess your business credit and financial health. Equifax has a sample business credit report that you can look at to see what information is available on Canadian small businesses. Their business credit report user guide provides more details on how to walk through your report.

It’s helpful to review your business credit report on an annual basis. But reviewing this report regularly can be extremely time-consuming and expensive.

Who can access your business credit report

Your personal credit score and reports are safeguarded by consumer protection regulations. Because of this, you must authorize a credit inquiry before another party can check your personal credit score. Here’s an example: when you apply for a mortgage, your bank or mortgage broker will need your permission to access your personal credit report and check your personal credit score.

In contrast, anyone can access your business credit report, as long as they pay the necessary fees to Equifax or TransUnion. This is because consumer protection regulations don’t apply to businesses. When you apply for financing or trade credit with lenders or suppliers, they will often pull your business credit report to evaluate whether your business is creditworthy and able to repay debts on time. Because lenders and suppliers will look at your report before working with you, it’s important that you monitor your business credit score and work towards building a high credit score.

Where can you find your business credit report?

To get more details about factors impacting your business credit score, you’ll need to access your business credit report. You can access a business credit report from Canada’s main credit bureaus, Equifax and TransUnion. Equifax’s business credit report and TransUnion’s business credit report may have different formats and details, but they will generally tell you the same story about your business, your business credit, and your business’ financial health.

What factors impact your business credit score?

There are a number of different factors that can impact your business credit score. When assessing your business credit score, you’ll want to find details regarding these different factors. Some key factors that can impact your business credit score include:

  • Payment history
  • Collections
  • Lawsuits, liens, and judgments
  • Credit utilization

Payment history

Your payment history with lenders, suppliers, and other vendors is a major factor that impacts your business credit score. You may need financing from lenders to solve cash flow problems or stock up on inventory. Either way, repaying lenders and suppliers on time is an essential component of keeping your business credit score strong.

Making late payments has a negative effect on your business credit. Having multiple late payments on file can cause your business credit score to suffer. The balance of these late payments will also impact your score, with high balances being more severe.

If you have a history of making late payments, you’ll be seen as less trustworthy by lenders and suppliers. They’ll view you and your business as risky, making you less likely to qualify for credit. If you’re aware of overdue payments you have with lenders or suppliers, you should focus on paying any outstanding balances in full.

Collections

A lender may escalate one of your late payments to a third-party collection agency. This collection agency will work on the lender’s behalf to collect the payment you owe. Collection claims will appear on your business credit report, including how late your payments are and the total amounts owed.

A history of unpaid debt collection will reflect poorly on your business and negatively impact your business credit score. If you have late payments with a collection agency, you should take quick action to pay outstanding balances. If that’s not possible, you will need to work with the agency to build out a repayment plan.

Lawsuits, liens, and judgments

Lawsuits, liens, and judgments that have been filed against your business will reflect on your business credit score. The presence of lawsuits on your business credit file is associated with higher risk of delinquency. The total number of lawsuits, along with their dollar amounts, has a negative impact on your business credit score. More recent lawsuits will have a larger impact.

If you’re aware of any outstanding lawsuits that have been filed against your business, contact a lawyer to get them resolved as quickly as possible.

Credit Utilization

You might rely on different suppliers for different business needs. Whether you need to lease equipment or make inventory purchases, you may have multiple trade credit accounts open with suppliers.

Incurring expenses on these trade credit accounts will increase your credit utilization ratio, which measures how much credit you are using in relation to your total credit limit. The more credit you use based on your total limit, the higher your credit utilization ratio will be. High credit utilization will negatively impact your business credit score.

If you’re using large amounts of trade credit, focus on paying off some portion of their balances. This will increase the amount of credit you have available and reduce your credit utilization ratio.

How can you build your business credit score?

Like learning a new hobby or teaching a pet new tricks, building your business credit score takes time. Doing so will provide you and your business with long-term benefits, such as higher borrowing power and better repayment terms with suppliers.

There are many steps you can take to build good business credit. Some of these steps are:

  • Open a bank account for your business
  • Apply for a business credit card
  • Establish trade lines with suppliers
  • Make payments on time, or early
  • Ensure your suppliers report your good payments
  • Monitor your business credit score regularly

Open a bank account for your business

If you haven’t done so already, opening a business bank account is an essential step in establishing business credit. A business bank account will allow you to separate your business and personal finances. It will also allow you to apply for business loans, merchant cash advances, or alternative lending products.

Using your business account to pay for business expenses will help you build your business credit score. These expenses could include utilities, commercial rent, and employee payroll. By managing your business finances and making on-time payments using a dedicated bank account, you’ll develop your business credit history over time. Having a strong business credit history will have a positive impact on your business credit score.

Apply for a business credit card

Applying for a business credit card specifically for business-related purchases is another way to keep your business finances and personal finances separate. This will allow you to build your business credit score without tapping into your personal credit balance and harming your personal credit score. Use a business credit card to make purchases such as marketing materials or furniture for your business location.

Establish trade lines with suppliers

Set up trade lines (i.e. lines of credit) with the suppliers that you work with. Even if you start with small credit limits, establishing supplier trade lines will allow you to build business credit and have documented proof of your payment history. For example, set up trade lines with suppliers that you need to rent equipment from or purchase inventory from often. These trade lines require you to make regular payments, which will boost your business credit score if you make payments on time. Success with a few initial suppliers will give you positive credit references to build on with future suppliers.

Make payments on time, or early

Establishing trade lines is only beneficial if you can pay on time. Ensure that you have the necessary processes in place to pay your lenders and suppliers on time. Late payments, even if they’re late by just a few days, can put a stain on your business credit report and decrease your business credit score. If you’re concerned about meeting payment deadlines, take some time to identify cash flow gaps that may be harming your business finances.

Ensure your suppliers report your good payments

Making on-time payments is essential for improving your business credit score. It’s only helpful, though, if your suppliers report your good payments to business credit bureaus. If your suppliers aren’t reporting your payments, your good payment behaviour won’t be reflected on your business credit report. This means your business credit score won’t improve!

Prioritize working with suppliers and vendors that you know will report your payments. If you’re unsure if one of your suppliers reports your payments, ask them. Encourage them to do so, as this will help you establish a strong business credit reputation with them. It will also help you build relationships with future suppliers.

Monitor your business credit score regularly

The most effective method of understanding your business credit is by monitoring your business credit score. You can do this by reviewing your business credit report from Equifax or TransUnion. Reviewing your business credit report will allow you to identify the specific areas that are bringing your score down, including missed payments, balances outstanding, credit utilization, and current lawsuits on your business credit profile. Having precise details from your business credit report gives you specific action items you can tackle to improve your score.

If you’re worried that there is inaccurate information in your report that’s harming your business credit score, you can contact the credit bureau to learn more about removing the mistake. Inaccurate information can go unnoticed and have long-lasting negative impacts on your business credit. Monitoring your report regularly is the best way to catch potential mistakes.

Get business financing while building your credit

Now that you know the importance of business credit, you can take the necessary steps to build your business credit score. This will increase your borrowing power, improve your reputation with suppliers, and help you create long-term growth and success for your business. If low credit is currently holding you back from getting business financing, don’t worry. There are bad credit business loan options that can provide you with the business financing you need. This will give you the opportunity to rebuild your credit by making on-time repayments for your loan.

Ready to grow your business and find new customers our there ready to try your product? Find out more about our small business loans.

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