The current economic climate is unquestionably tough for small businesses that often have trouble getting the credit they need to secure loans, make payroll, manage inventory, or expand. According to the Better Business Bureau, lending hasn't been this challenging in decades and legislation to support businesses remains unclear. So how can small businesses improve their credit profiles and ultimately their credibility with vendors, creditors, and customers? Every business has its own challenges, but these ten tips are the most significant changes an owner can make to strengthen their business' credit:
Separate business and personal accounts. Log and submit all business payment activity under accounts that are exclusively under the name of the business with credit agencies. Positive business transactions establish a credit track record and indicate future performance.
Submit audited financial statements to companies such as Dun & Bradstreet Credibility Corp. to properly portray your company's financial history. In many cases, a complete statement is not required, just key, high-level data points (such as Current Assets & Liabilities, Net Working Capital, and Ratable Net Worth).
Always pay vendors on time, or early if possible. Late payments, or late payments that have been erroneously reported, can have a negative impact. Actively monitor your business credit report at least quarterly and look for any late payment notices. In the event there is even a tinge of an incorrect late payment notice, request an investigation.
Clear your credit profile of any outdated public UCC filings. Typically, banks require businesses to put up assets as collateral in exchange for a loan when purchasing large equipment. Per the Uniform Commercial Code (UCC), the bank would report that transaction and note the collateral that was used in exchange for the loan. Once the loan is paid off, the collateral asset is no longer at risk, but if the bank does not report that the loan is paid off, the credit agency is unaware and the result is a credit score that still reflects this liability. Unfortunately not all financial institutions are diligent about removing these filings once they're expired or the obligation has been met.
Ask suppliers to report transactions with your business to credit agencies. Unfortunately, this is not standard practice. Unlike on the consumer side where legislation requires businesses to report all consumer payments and transactions, for businesses reporting on businesses, it's voluntary. And while there are a large number of companies that are reporting large volumes of transactions, it's still a fraction of the overall business transactions/payments happening in the marketplace. You can be proactive by asking or by filling out a trade reference request.
Review payments that are automatically reported on your business each month. If you haven't been late in paying your bills, but your credit report indicates something different, you can request an investigation for the vendor and dispute the payment information in your file.
Be sure to amend any incorrect or out-of-date business information. As your business grows, it's important to keep your credit profile up to date. For example, the more employees you have, the bigger your company is and consequently it will often be perceived as being more credit-worthy.
Build a credit history for your business. Open up business accounts with companies that have a reputation for extending credit to start-ups without requiring personal credit (such as Dell, FedEx or Home Depot). Building a credit history is as important to your business as it is to your personal credit.
Request vendors to serve as credit references to validate records. Credit agencies, such as D&B, require vendors to provide information about how they are being paid by a company. This information is vital. Once this is confirmed with the vendor, this verified information is added to the subject company's credit report, which is updated to reflect a recalculated score.
Purge your credit files of any resolved lawsuits and liens that are no longer applicable. Both of these create uncertainty regarding creditworthiness and overall financial health.
There's no perfect solution to lift yourself out of the depressed economic climate, but it often starts with increasing your credit. All of this can be done by taking the initiative. Increased credit affords businesses better relationships with partners, vendors, trade sources and the community at large. From there, your business will be in a position to grow, both through an increased financial capacity and a better overall reputation. In this market, credit equals credibility.
Jeff Stibel was previously President and CEO of Web.com and General Manager of Web Services at United Online. He currently serves on the Board of Directors for The Search Agency, EdgeCast, Autobytel, and VitaCost, as well as on academic Boards for Tufts University and Brown University.