As accounting professionals, you understand the importance of financial health for any business. A strong credit score unlocks a world of opportunities, from securing loans for expansion to attracting better vendor terms. But for many of your clients, especially those just starting out, building business credit can seem like a daunting task.
This article equips you with the knowledge and tools to guide your clients through the process of establishing and building their business credit profile.
Why Business Credit Matters
Think of business credit as a separate report card for your clients’ companies. It tells lenders and vendors how reliable they are at managing finances. A good business credit score translates to:
- Easier loan approvals: With a strong credit history, securing loans for equipment, inventory, or expansion becomes significantly easier. Lenders are more likely to approve applications and offer competitive interest rates.
- Improved vendor terms: Many vendors offer discounts or extended payment terms to businesses with good credit. This can improve cash flow and free up resources for other areas.
- High reputation: A strong credit score portrays your clients as financially responsible, which can be a major advantage when attracting new customers and partners.
Building Blocks of Business Credit
There are several key steps your clients can take to build a robust business credit profile:
- Establish a Separate Business Identity:
- Formalize the Business Structure: Encourage clients to register their business as a Limited Liability Company (LLC) or a corporation. This separates their personal finances from the business, creating a distinct legal entity.
- Obtain an Employer Identification Number (EIN): An EIN is like a Social Security number for a business. It’s important for opening business bank accounts, filing taxes, and establishing credit.
- Create a Paper Trail:
- Open a Dedicated Business Bank Account: This keeps business and personal transactions separate. Having a business bank account history demonstrates responsible financial management.
- Get a DUNS Number: A DUNS number is a unique identifier assigned by Dun & Bradstreet, a leading business credit bureau. It helps establish your client’s business as a legitimate entity. You can obtain a free DUNS number from Dun & Bradstreet’s website.
- Build Positive Payment History:
- Pay Bills on Time: This is the single most critical factor in building business credit. Late payments can significantly damage a credit score. Encourage clients to establish automated payment systems or set calendar reminders to ensure prompt payments.
- Establish Trade Lines with Vendors: Many vendors report payment history to business credit bureaus. Negotiate net 30 or net 60 terms with suppliers, where payment is due within 30 or 60 days of receiving the invoice. Making on-time payments to vendors builds a positive credit history.
- Utilize Credit-Building Tools:
Bonus Tips for Your Clients:
- Monitor Business Credit Reports Regularly: Encourage clients to obtain and review their business credit reports from all three major bureaus: Dun & Bradstreet, Experian, and Equifax. This allows them to identify and address any errors or inaccuracies that could negatively impact their score.
- Build Relationships with Lenders: Establishing a connection with a local banker or credit union can be beneficial. These relationships can make it easier to secure loans and other financing options in the future.
- Seek Expert Guidance: As their trusted financial advisor, you can play a crucial role in their credit-building journey. Offer guidance on best practices and connect them with resources to help them achieve their financial goals.
Conclusion
By following these steps and with your expert guidance, your clients can build a strong foundation for their business credit. A healthy credit score will unlock numerous financial advantages, making them able to focus on growing their business and achieving long-term success.
Remember, you are a valuable asset in your clients’ financial journey. Equipping them with the knowledge and tools to build strong business credit strengthens your relationship and fosters their long-term success.