Every time Jason Pereira’s financial planning firm leases a printer or talks to the bank about borrowing money, its business credit score is checked. Companies want to know not only with whom the firm is doing business, but also its financial wherewithal.
It’s why Mr. Pereira and his partners work hard to keep their business credit score high, by doing everything from paying suppliers on time to making sure they don’t max out their corporate credit cards.
“Business credit scores matter, especially in the current banking climate,” says Mr. Pereira, a partner and senior financial consultant at Toronto-based Woodgate Financial Inc. “If you want to have access to capital you need to have as much ammunition as possible – and credit scores are part of it.”
Woodgate’s strong credit score helps it borrow at good rates and take advantage of opportunities such as acquisitions, expansions or major purchases. “Businesses need a solid credit rating to get ahead,” Mr. Pereira says.
Credit scores are gaining a lot of attention lately. A growing number of financial technology startups are offering them for free, alongside numerous advertisements boasting the benefits of knowing your score. But what small business owners may not realize is they have separate scores for their personal finances and for their business, and both need to be monitored and maintained.
“Building out a good business credit history is just as important, if not more important, as an entrepreneur building out their personal credit history,” says Pamela Dodaro, executive director of business solutions at TransUnion Canada, one of Canada’s two main credit reporting agencies.
As with consumers, businesses have credit scores that, if they are good, can help them secure better borrowing terms and lower interest rates. A good credit score can also help businesses when buying insurance and can even give them the flexibility to extend payment terms with suppliers.
“Many small business owners probably aren’t even aware their small business credit history is being built up and it’s a benefit to them,” Ms. Dodaro says.
Business scores are different from personal scores in that other companies can access them, says Cato Pastoll, chief executive officer of Lending Loop, a peer-to-peer lending marketplace focused on small business. It offers free credit scores through its website, Getloop.ca.
Mr. Pastoll says anyone can check a company’s credit score if they pay a fee through a credit agency such as TransUnion or Equifax. Business owners not only should have a good score to attract better quality customers and suppliers, but may want to check the credit scores of companies they plan to do business with.
“If your company is about to take on a large contract and it’s really important to your business ... it’s definitely something they should look into to see if the company is trustworthy,” says Mr. Pastoll.
He also recommends that business owners stay on top of these credit scores and know what’s in the report.
Factors that determine your business credit score include how much credit you are using (the further away from your credit limit the better the score can be), payment history (whether you make payments on time), credit history (how long you’ve been in business), public records (such as bankruptcies, liens or lawsuits against the company) and outstanding debts.
Paying suppliers on time is key to building up a strong business credit score, says Ms. Dodaro of TransUnion. “That shows how well you are operating your business. Do you have the cash flow to support it? It’s really how you are managing making your payment toward your obligations.”
For startups, she recommends owners apply for a credit card and/or a line of credit in the name of their business to begin creating a credit footprint as soon as possible.
“Once you establish that business credit, that’s when you can improve your access to finance, interest rates could be better and ... your borrowing power increases by getting you larger credit facilities," Ms. Dodaro says. "That’s the power of establishing that initial business credit.”
As the business matures, Ms. Dodaro urges entrepreneurs not to co-mingle their personal and business expenses. Keeping them separate will help new business owners establish a credit history for their companies more quickly.
And while business and personal credit are separate, she says some lenders look at both when determining loans for small businesses.
“It’s important first to understand the information on which creditors are making decisions about you as a business," she says, "and to be financially literate about that.”