Establishing and maintaining creditworthiness is essential to the success and financial health of your business. It could mean the difference between getting approved for funding or denied, what types of credit terms and interest rates you’ll pay, and whether an investor or supplier decides to do business with you.

As a business owner, it’s critical that you take the steps necessary to establish yourself as a good credit risk. Being able to demonstrate that your company has a solid history of making prompt payments and managing debt can help position your business more favorably with banks and commercial lenders.

Here are five things you can do to improve your company’s creditworthiness:

1 – Establish your business as a legal entity.

Whether you are a startup or a growing company, creditors look for signs that a business is viable and profitable. Establishing your business as a separate legal entity not only shows that you are a serious business owner, but it can also protect your personal assets.

The legal structure you choose can impact how you pay taxes, how much paperwork is required to file, and how your business can distribute its profits. In the eyes of many lenders, if you operate as a sole proprietorship, you carry a much greater risk compared to a corporation or limited liability company (LLC). Forming a corporation or LLC disentangles personal debts from business debts.

Here are some other steps you can take to establish a firm foundation for your business:

  • Obtain an EIN (the business equivalent of a Social Security number) from the IRS, along with a DUNS business credit profile number from Dun & Bradstreet (D&B).
  • Establish a physical address and separate phone line and bank accounts for the business, prepare a professional business plan, and acquire a business license.
  • Maintain impeccable financial records, such as income and balance sheets, and tax return documents.

2 – Maintain a strong personal credit score.

For business owners, the importance of having good personal credit can’t be overstated. Although you and your business have separate credit scores, maintaining strong personal credit can be essential to the financial health and growth of your business, especially if you’re looking for financing.

Your personal credit score can be a key factor in securing financing from investors, a business loan, or getting credit from vendors. Many lenders look at your personal credit history as a measure of your ability to meet your financial obligations. Creditors may also take advantage of blended commercial scoring tools that integrate both personal and business credit to assess and predict small business risks.

While personal credit is not typically the sole factor creditors rely on as a predictor of business behavior, it’s advisable to make every effort to maintain a strong personal credit score or improve your score if it is less than perfect.

3 – Make sure your business credit report is accurate.

Unlike your personal credit, there is no single data source for determining your company’s creditworthiness. However, D&B produces a business information report that is similar to a personal credit report. It is generally considered the industry standard by banks and other lending institutions for evaluating both new and existing credit relationships. Potential vendors and other companies may also consider the D&B report to help them decide whether or not to work with you.

Review your company’s D&B report to ensure that it is up to date and accurate. D&B relies on information provided by customers and lenders as well as from business owners. Include as much data as possible to create a complete picture of your business’s credit history, such as financial statements, AR/AP aging reports, and payment records that show you are meeting credit terms. This is particularly important if you make cash payments that will not otherwise show up in your report.

4 – Review your UCC filings annually.

Many business owners borrow money or open lines of credit. When a bank or commercial lender makes a secured loan, they file a Uniform Commercial Code (UCC filing) document indicating their collateral interest in the borrower’s assets. The UCC filing is recorded with various state and local jurisdictions to protect the lender’s interests.

It is important to have a basic understanding of the types of UCC filings most often used by lenders and to do a search on your own business once a year. If a UCC Financing Statement is filed against your business, it does not affect your credit score, but it may prevent you from borrowing money from a new lender or selling your business. It is advisable to make sure the UCC filing is terminated by a lender as soon as the loan is paid off and to keep good records in order to avoid surprises down the road.

5 – Resolve tax liens.

Having a tax lien means the government has a legal right to your property – including real estate, personal property, and financial assets – because you have failed to pay a tax debt. The tax lien appears on your credit report and can have a negative impact on your credit scores, similar to a bankruptcy or a judgment.

If a tax lien appears on your credit report, you need to address the situation to determine if the liability has been paid. If you are certain that the lien has been paid, contact the IRS about getting a release to clear up the issue. If you are unsure about the status of the lien, some experts advise working with a tax professional who is well versed in handling tax controversy cases.

Keep in mind that, according to the Fair Credit Reporting Act, a tax lien can stay on your credit report for seven years from the date it is satisfied or paid. However, the IRS has a Fresh Start initiative that allows consumers who have paid certain tax liens or entered into an installment agreement to request they be withdrawn and removed from their credit reports.

Protecting your company’s credit is essential to securing the funds you need to grow. If you are experiencing problems establishing credit and need financing for your business, Summit Financial Resources can create custom solutions with reasonable rates and structures that banks and other commercial finance sources cannot provide.

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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.