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It’s a good practice to review personal credit reports from the major credit bureaus, but have you considered monitoring them for your business? This article walks through why it’s important for business owners and partners to pursue a good business credit rating.
Often, large public companies have teams of people dedicated to reporting organizational changes to the business community and credit rating agencies. Smaller private companies, however, must make more of an effort to ensure that their credit reports accurately reflect the current state of their businesses. They need to make certain that reports are free of errors or omissions that could damage their reputation or hinder access to loans or other forms of credit.
Just as individuals are advised to regularly request and review their credit reports from the major agencies, businesses should also monitor their credit profiles. Like a personal credit rating, a business credit rating provides potential creditors or business partners with a summary of the company’s transaction history. This history is used to determine the level of financial risk the firm represents to the bank or vendor, as well as the likelihood that the business will default on a loan or fail to pay its bills on time.
A good credit rating becomes especially important when a business is seeking to increase its line of credit, attract new investors, to partner with another organization, or sell the company. A strong rating is also useful when the business is making growth-related investments, such as purchasing new equipment, establishing a relationship with a supplier, building inventory, or hosting a promotional event. A credit score influences not only whether a bank approves a loan, or a partnership is formed, but also whether the interest rate and terms of the agreement are favorable to the business.
Information contained in a credit report may be drawn from all organizations with which the company has been involved, including suppliers and creditors. The report will reflect whether the company pays its bills on time or is frequently late in meeting obligations. The report will also show a history of all secured and unsecured loans, working capital, cash flow, sales volume, and overall debt-to-asset ratio. Any liens, collections, or legal judgments against the company will also be included. In addition to fiscal information, a credit reporting agency’s company profile may also include information on the size of the company, employee numbers, major shareholders, business structure, location, history, and reputation.
In developing strategies to maintain or improve a credit rating, start by ensuring that the firm and all employees follow responsible payment procedures. To the greatest extent possible, strive to minimize or effectively manage debt, while increasing assets. Report all information relevant to the business profile, such as ownership or address changes, to the major credit agencies, and check the reports regularly for any errors or omissions. If mistakes or other problems are found, be sure to contact the credit agency to request a correction.
In addition, all information provided to the credit rating agencies immediately becomes publicly available—even to competitors. In some cases, more sensitive data should be withheld from the credit rating agencies, only revealing certain information, on a need-to-know basis, to prospective lenders or business associates.
As the company expands, entrepreneurs should seek to separate their personal credit from their business credit. For example, someone may wish to move from a sole proprietorship or partnership structure to a limited liability company (LLC) structure. Besides enabling owners to separate their business and personal liability, an LLC can also provide certain tax benefits. For more information, consult your tax and legal advisors.
Even so, business owners cannot ignore the health of their personal credit histories, as lenders will often consider the credit scores of all major shareholders during the loan application process. Therefore, maintain a strong personal credit profile, reviewing it regularly and requesting corrections, when necessary. According to the Fair Credit Reporting Act (FCRA), individuals may request a free copy of their credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) annually. For convenience, all three agencies may be accessed through a single website at www.annualcreditreport.com.
