What is Corporate or Business Credit?
Corporate Credit, or Business Credit, is credit that is earned and assigned to a corporation or business rather than an individual person. This credit is essential in establishing and maintaining business or banking relationships with potential creditors, vendors, business partners, or even clients. This is because the “credit profile” established by the various credit reporting agencies, and the subsequent credit ratings, are based on your past and current credit history, among other significant factors. This profile and rating system is used by potential creditors, vendors, clients, or business partners to gauge how reliable your company is and whether or not to extend credit to your company, or to engage your company in a business relationship.
If I Build Business Credit, How Can It Benefit My Company?
The advantages of having established Corporate Credit range from simple operational issues, all the way up to allowing your company to withstand scrutiny from a potential client who may gauge how reliable and proficient your company is by how well your credit profile reads.
From an operational perspective, establishing Corporate Credit allows you to do such things as purchase supplies, pay debts, maintain facilities, hire additional staff, compensate for a downswing or upswing in business, etc., without depleting vital liquid assets. If you establish business credit you will be assured that your business has the ability to respond rapidly to market demands or growth. For example, while an increase in orders or business is usually a good thing, having the proper credit facilities to allow your company to respond to such demands by facilitating the increase in operational capacity without having to “front the cash” will go a long way to ensuring a much better response to the increase. Other advantages include the fact that many lending institutions, lease providers, etc., base their interest rates on what the Business Credit Profile and rating is for your company. Having established credit can lead to a substantial savings in interest rates and much more favorable lease and loan terms.
Why Shouldn’t I use My Personal Credit Profile for My Business or Corporation?
Using your personal credit profile, also known as your “Consumer Credit Profile,” in lieu of establishing proper Business or Corporate Credit is a bad idea on many fronts. Much like guaranteeing any corporate loans or debts personally, or “co-mingling” of corporate and personal funds or assets, the use of one’s personal Consumer Credit Profile for the benefit or operation of the company can lead to an “alter-ego” determination by regulatory or financial organizations, and a piercing of the corporate veil. This would directly endanger the owner’s personal assets and make the owner or owners directly liable for the penalties or repayment of any debts incurred by the company or corporation. It is always a good idea to build business credit rather than abandon the corporate form through the co-mingling of funds–and this includes the “co-mingling” of credit profiles.
Another disadvantage of using your Consumer Credit Profile in place of proper Business or Corporate Credit is the fact that the use of personal credit for the operation of a company can be accompanied by the very real consequence of making your company appear inadequately funded or operated, or may incorrectly infer that your business credit is unstable, unreliable, or overextended. This is further compounded by the fact that there are different rules and determinants for the granting of consumer credit, and what might be perfectly normal and acceptable for a Corporate Credit Profile, such as multiple applications for credit that are a regular matter of course for a business, can have a negative impact on a Consumer Credit Profile.
What Factors do other Companies or Lending Institutions Look for in a Corporate or Business Credit Profile?
There are a number of factors that make up a company’s credit profile, but they can be summarized by a few key points. These factors are taken into consideration by potential creditors (lending institutions, banks, etc.), and also by potential vendors and even clients before deciding to grant credit, extend a loan, or engage your company in a business venture.
These factors are as follow:
- Assets: This is the single most important measure. What is your company worth? Does your company have the capital or liquid assets to effect repayment? How healthy is its balance sheet? How much operating capital does it have? This is probably the most significant and most often considered factor when deciding whether your company or corporation is credit-worthy.
- Ability: Can your business or company repay its loans? How reliably has your company repaid its loans in the past? Were the payments timely? How much credit has been granted to your company? By whom? How much debt has it incurred? Are there any outstanding or unused lines of credit? All of these questions play a significant role in a creditor deciding on your company’s ability to pay its loans.
- Acumen: How long has your company been in business? How healthy is your business? How is it run? What type of economic environment is it operating in? Is it in a declining sector (think manual typewriters in the early 90’s)? How is it’s stock performing? How many people does it employ? Are there a significant number of judgments or liens against it? Does it readily disclose these things? The ability of your business to stay in business is also a very important factor that is considered by others when you are trying to establish business credit.
Who Rates my Corporate Credit?
There are quite a few Firms that track Corporate Credit and other “Business Health Indicators.” Although all of these Firms use a variety of proprietary methods and “grades” by which to rate companies, they all collect much of the same information.
The Firms most often consulted in order to review corporations or business for Credit and Risk profiles include:
- Dunn and Bradstreet (D&B™)
Some of these Firms specialize in smaller businesses, others in the whole lot, but it is important that you know what criteria they use in rating or profiling a company, and that you strive to meet the appropriate criteria in order to maintain or improve your Corporate Credit Rating.
How do I get my Corporate Credit Rating to Improve?
Every time you make a payment on time, to a company or business that is itself rated by any of the Firms mentioned above, a record is being made in your credit profile. It is important that the business you deal with also report to the various agencies as this ensures that your experiences, and payments, are duly recorded.
Keep your debt in check. This means that you incur only as much debt as you need operationally, and that you keep tabs on credit lines and other debt-financing. The more debt your company has, the more net worth or income it must have in order to not have it impact negatively in your Credit Profile. Too much debt, or too many potential debt expenditures may negatively impact your credit worthiness.
Keep your Personal Consumer Credit Profile in good standing. Although the Consumer and Corporate Credit Profiles are completely different and are not supposed to have relevance to each other, prospective lenders or credit providers may indeed examine the consumer credit profile of the owner(s) in order to establish business credit worthiness. Having your Consumer Credit in good standing can positively impact how your Corporate Credit Worthiness is perceived. Play an active role in your own Profile. It is very important that you actively review, and play an active role in the maintenance of your credit profile. Make regular reports to your profile, contribute all that you can, and ensure that any entries in your report are accurate. It is also a worthwhile measure to compare and contrast your profile with other companies or corporations that are similar to yours to see what the trends are, where you fall in that group, etc.
Seek expert advice. When you are ready to play an active role in establishing or improving your profile, consult with experts that have proven track records in this arena. They will know how to navigate through the some times murky waters that can lead to improved credit worthiness and a worthy Corporate Credit Profile for your business.
It isn’t enough any more to simply have a Corporate Credit Profile. In order to stay ahead of the pack in these highly competitive markets, establishing a well thought out business credit profile, and improving its standing, can pay huge dividends for you and your company.