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5 Small Business Credit Pitfalls to Consider Avoiding

Lenders, investors, and potential collaborators may rely on your business's credit scores and ratings to help them evaluate risks, making it vital to maintain an up-to-date business credit file. Neglecting this aspect can potentially hinder your progress.

Despite good intentions, small business owners can make mistakes that impede their goals. Here are the five critical pitfalls to consider when taking steps to establish business credit.

1. Not Monitoring Business Credit Scores and Ratings Often

Entrepreneurs, sole proprietors, and small businesses in their early stages should prioritize establishing a robust financial reputation that can be reflected in their business credit scores and ratings. Business credit scores may help convey reliability and trustworthiness to suppliers, partners, and customers.

Since credit bureaus like Dun & Bradstreet continuously update their data, your business credit scores and ratings can continuously change as well. Therefore, it's crucial to keep a close eye on these changes and act if necessary.

Tools such as D&B Credit Insights Basic can help alleviate the credit monitoring workload. Visual reporting and clear impact analysis can help you understand the information in your credit file without unnecessary complexities.

There may be instances where you require 24/7 access to view some of your business scores, such as when applying for a loan or bidding on a contract. With this tool, you can receive timely alerts about certain score changes and legal matters related to your business. This valuable insight can help you safeguard and potentially expand your business.

2. Using Outdated or Inaccurate Business Information

It's easy to overlook the specifics amidst the flurry of applications, filings, and documentation that can accompany business startups and new partnerships. Changes in your business's location, name, or contact information may inadvertently slip under the radar, leaving your business credit records outdated.

Maintaining a clear separation between your personal and business details when possible, can be essential. For example, avoid listing your personal cell phone number when your business has a dedicated line.

Additionally, to support an up-to-date business credit file, ensure supporting documents align perfectly with the records held by business credit bureaus.

3. Paying Business Expenses with Personal Accounts

Dun & Bradstreet only uses business transactions in business credit files. If you pay business expenses with a personal credit card, it does not go into your business credit transactions.

Aside from paying bills on time, which can impact certain business credit scores, business owners should prioritize using corporate checks or credit cards for business transactions to help maintain a clear division between personal and business credit.

Consider the following steps when paying business expenses:

  • Apply for a business checking in the company's name; use this account exclusively.
  • Educate employees and create a finance policy.
  • Review financial statements weekly and monthly to catch mistakes.

4. Operating the Wrong Business Structure

The choice of your business structure can impact how your company is perceived.

For example, sole proprietorship is favored by many small business owners because it treats the business and its owner as one entity, requiring no formal paperwork. Business earnings and losses are reported on the owner's personal income tax return.

While this may seem like a simple way to organize a business, it comes with drawbacks, including personal liability for legal judgments against the company and potential damage to your personal credit from business financial struggles.

Meanwhile, a corporation is a distinct legal entity separate from the owner. This separation is crucial because negative information about your personal credit should not impact the corporation, and your personal credit score can be somewhat shielded from your company's actions.

Deciding how to structure your business is a critical decision and can impact your business credit. It's highly advisable to consult with an attorney when determining the best business structure for your company.

5. Using Vendors that Don't Report Trade Credit

When a company extends trade credit to another business, it agrees to deliver goods or services with a commitment to receive payment later. This is valuable for new businesses with limited cash flow, as trade credit is typically more accessible than conventional business loans.

However, simply paying invoices promptly may not be sufficient to positively influence your business's credit scores and ratings. To potentially enhance your business's credit scores and ratings, it's essential for your payment experiences to be reported to Dun & Bradstreet.

Check with your suppliers to determine whether they share payment information with business credit bureaus. If they don't, you can encourage them to manually submit Trade References through specific products offered by companies like Dun & Bradstreet.

Before You Go

Small businesses should consider the five common obstacles outlined above. Monitoring your business credit file with tools such as D&B Credit Insights Basic can help you lay the foundation for securing growth opportunities and valuable partnerships. Don't you want to know the information in your business credit file before it's potentially brought into question?

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Nov. 15, 2023

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