When starting out, most business owners rely on their personal credit for financing, typically using their credit cards or taking out a personal loan to finance their start-up. For that, they rely on their personal credit report to gain access to the financing they need. At some point, your business needs its own credit if you expect to take it to the next level. Building a business credit history can take some time, but it is essential to gain access to capital when needed while limiting your personal liability. Lenders rely on your business credit report to determine credit risk.

Business and consumer credit reports are similar in their purpose, which is to provide prospective lenders with a credit profile for determining credit risk. However, they differ in the type of information they contain and how they are used.

Your Personal Credit Report

When you establish personal credit accounts, creditors report your credit activities to the three major credit bureaus - Experian, TransUnion, and Equifax - which, in turn, compile a credit profile. When you apply for credit, a lender will request a credit report that includes the following information:

• A list of your credit accounts, including loans and credit cards
• Balances owed and the current monthly payment on each account
• Status of accounts (current or delinquent with the number of days past due)
• A list of closed accounts
• Public records of liens, judgments, and bankruptcies
• Information on past and present employers
• History of residential addresses

Credit bureaus analyze the information to generate a credit score, which lenders use to measure creditworthiness. Although your credit score may differ slightly among the three credit bureaus, they generally use standard methods established by the Fair Isaac Corporation that generate your FICO score. Consumers are entitled by law to receive one free credit report from each credit bureau; however, the credit score is not included with the credit report and must be purchased separately.

Your Business Credit Report

Once you receive your business’s federal tax identification number (FIN), the business credit bureaus begin tracking trade credit and other credit activities. Trade credit transactions occur when a business sets up a payment arrangement with a vendor or supplier. Payments on trade credit are reported to the three business credit bureaus - Equifax, Experian, and Dunn & Bradstreet - which then compile a report with the following information:

• Background information on your business, including ownership and subsidiaries
• Financial information
• Banking, trade, and collection history
• Liens, judgments, and bankruptcies
• Risk scores

From the information, the credit bureaus generate a risk score, similar to a credit score, that measures the business’s creditworthiness. However, unlike a credit score based on an established set of factors and algorithms, the credit bureaus use their own factors to generate a risk score.

Building Good Business Credit

Without a business credit profile, lenders rely on a business owner’s personal credit profile to determine credit risk, which can limit the business’s ability to obtain the capital it needs to grow. It is essential to build business credit early on and maintain a solid credit history. These are the key steps a business needs to take to build a solid credit profile:

• Create a separate legal entity for the business, such as an S-Corp, Partnership, or LLC
• Separate business and personal accounts and recordkeeping
• Establish trade credit accounts with vendors and suppliers
• Obtain a business credit card; it could start with a gas card. If a bank offers a business credit card, make sure it reports payments to the business credit bureaus
• Make all payments on time
• Order your business credit reports regularly to see that they are correctly updated

Business credit reports are also very useful business management tools. Each of the business credit bureaus offers premium reporting services that can provide in-depth analysis for business forecasting and managing your credit risk.