According to the Small Business Administration (SBA), there are approximately 28.8 million small business owners in the United States of America. Small business owners have unique needs in that they need access to credit but often don’t have the large amounts of cash flow coming in that larger business and corporations do. One of the most important aspects of maintaining your small business is to establish credit for the business itself. So why does your business need to establish a great credit rating?
Just like your personal credit report, a business credit report helps institutions and organizations determine how financially sound your business is. Having a poor business credit rating can negatively impact your ability to expand your business, as well as limit the amount of capital available to your business. Building a strong financial reputation for your business can help your small business in short and long term. Here are ten facts about the importance of establishing your small business’ credit.
Fact #1: According to a survey conducted by the NSBA, nearly one in four businesses were denied funding. This significantly impacted the growth abilities of these businesses.
Fact #2: Almost half of all small businesses used personal credit cards rather than business credit cards. By failing to separate business and personal expenses, the businesses were unable to establish their own credit worthiness while also putting small business owners at risk of being personally liable for their businesses.
Fact #3: Recent studies by the NSBA found that 20% of requests for small business loans are denied each year due to poor business credit and/or a lack of established business credit.
Fact #4: Millions of business credit reports are run through agencies like Creditera, Dun & Bradstreet and Equifax Commercial each year. In the first half of 2013 alone, Creditera, Dun & Bradstreet reported that they received 45 million business credit requests.
Fact #5: Some surveys suggest that almost half of small business owners had no knowledge that their business even had a credit score. Over 70% of small business owners didn’t know where they could find business credit score information, while just over 82% were unable to interpret their credit scores.
A significant number of financial institutions place a business credit score of 75 as “acceptable.” This means that businesses with lower scores may find themselves unable to receive a small business loan.
Fact #7: It can take up to one and half years for the average business to raise its business credit score.
Fact #8: One third of small business owners receive money from friends and family in order to make ends meet or to start their businesses. Meanwhile, ¾ of young firms are able to obtain necessary funding through business loans and credit.
Fact #9: Companies all over the world use data from Dun & Bradstreet to manage risk and find quality leads. If your business credit rating from Dun & Bradstreet is low, then your business will have a difficult time gaining access to the capital needed to function and expand.
Fact #10: A recent study from Mercator Advisory Group states that approximately $430 billion in spending comes from small business credit cards.
As you can see, having a great business credit score is the key to gaining access to the essential capital your small business needs to operate. Without it, you will find it difficult to run your small business on a day-to-day basis while covering inventory, paying your employees and expand as needed. Other than building up the capital your business needs, there are a few other benefits to building up the creditworthiness of your small business.
- The first benefit lies in protecting your personal assets from those of the business. If your company has a great financial reputation and the credit to prove it, you will be able to avoid having personal credit checks run on you for loans and other financial transactions. This helps you to keep your business and personal expenses and liabilities separate.
- The second benefit to having a great business credit score is that your business will have access to more credit than you as an individual would. Your business won’t be as limited in how much money it can borrow or have access to because business loans and credit are generally offered in larger sums.
- The third benefit is that your company’s value will increase. When your business has great credit, it becomes more valuable to investors. Your business will also be more attractive to potential buyers if you were to ever sell it.
By building up the creditworthiness of your small business, you are ensuring your company’s stability and opening up windows of opportunity. When your business has a great credit score, lenders and suppliers will be willing to work with you and build essential relationships that will keep your business strong and profitable in the long run.