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 small business owner, it’s critical that you take the steps necessary to establish yourself as a good credit risk. When you can confidently demonstrate that your company has a good history of making prompt payments and managing debt, you will become a more attractive customer to banks and commercial lenders.

Here are several factors that may play a role in determining how fundable your business is and what you can do to improve your creditworthiness.

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.

Remember that 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 solid 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.
  • 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.

Remember that good personal credit is a business asset.

Business owners must stay on top of their personal credit even more than the average consumer. 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, the Summit Financial Resources team recommends making every effort to effectively manage your personal credit and improve your credit score if it’s less than perfect.

Keep your business credit report current.

Unlike your personal credit, there is no single source of data for determining your company’s creditworthiness. However, Dun & Bradstreet (D&B) creates a small 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 do business with you.

Review your company’s 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. The more information you provide, the easier it is for lenders like Summit Financial Resources to provide you with credit when you need it.

Apply online and get started today >

Review your UCC filings.

Many small 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

Resolve tax liens.

In our experience, clients are often surprised to find tax liens on their credit reports. 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.

It’s important to note that, according to the Fair Credit Reporting Act, tax liens can stay on your credit report for seven years from the date they are 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.

Taking the necessary steps to protect your company’s credit is critical to securing the funds you need to grow. If you’ve had problems establishing credit and need financing for your business, Summit Financial Resources can help. Our invoice factoring and asset-based lending options are based on your cash flow and customer creditworthiness, so other financial hiccups are less important.

Working Capital Financing is a few clicks away.

Apply online and get started today >

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.