Submitted by Schmersahl Treloar & Co
As you probably know, construction businesses are frequently scrutinized for their creditworthiness and financial stability by sureties, banks, insurers and other parties. Your ability to build and protect your financial reputation is critical to winning work and managing risk.
Building creditworthiness is a daily and monthly process. But the payoff is worth the effort: easier access to equipment financing and surety bonds, and the ability to negotiate favorable loan terms and conditions. What’s more, contractors with good business credit ratings are likely to win more contracts because they’re usually seen as more reliable by project owners and potential partners.
Eight Tips for Building and Preserving Credit
Review the following eight tips for enhancing your business’s credit.
1. Separate business and personal credit. Among the first critical steps for anyone establishing a company is to separate business from personal finances. Opening a commercial bank account and credit card, and paying bills in your company’s legal name, will create a distinction between your business and personal credit. You also should apply for a federal Employer Identification Number from the IRS. All of this helps to establish a business credit profile.
2. Establish lines of credit. It may sound like a Catch-22, but you need credit to build credit. Set up lines of credit with your trade-specific vendors or suppliers and make sure you pay bills in full on time. A positive history of on-time payments shows your company is reliable and can effectively manage its debt. A late payment history, on the other hand, will ding your business credit rating.
Many lenders don’t consider a company’s credit history to be established until it has three business credit cards, two loans fully paid off and five “trade credit” accounts reporting financial transactions to credit bureaus. You can establish trade credit accounts by securing payment terms, such as net-60 or net-90, with vendors or suppliers that report those payments to business credit reporting agencies.
3. Get a D-U-N-S number. Dun & Bradstreet (D&B), Equifax and Experian all gather financial information on businesses to generate credit reports. However, D&B is the only credit bureau with which you must register to start tracking your business credit. Registering is important because some insurers require their insureds to maintain specific D&B scores and ratings.
The D&B application is free and ensures that a credit file is established under your company name. You’ll receive a D-U-N-S number that enables you to review your credit file and make changes to your business and demographics information. Be proactive about maintaining D&B scores. You may need to pay fees to activate your credit report and add trade references (trade credit accounts). But the expense generally makes sense because it helps ensure that businesses are reporting your company’s financial transactions with them to D&B.
4. Monitor your credit history. Do you know your company’s credit scores? Periodically check your scores and review credit reports for errors and inaccuracies that may lower them. Even simple errors, such as a wrong address, can negatively affect your credit reports. If you do find an error, file a dispute with the credit bureau. Any mistakes should be corrected as soon as possible.
5. Reinvest in your business. Congratulate yourself on having a profitable business — but don’t just spend the proceeds. Use profits to establish a cash reserve, pay down debt and reinvest for growth. Setting monthly and annual targets will help you meet your reinvestment goals.
6. Don’t max out accounts. If you consistently max out business credit cards, it can lower your credit score. Aim for a credit utilization (the percentage of available credit you use) of 30% or less and a debt-to-income ratio at 45% or less. You should also know that closing out credit accounts and removing them from your credit report just because they’re paid in full may have an adverse effect on your credit rating. In fact, it may limit the amount of credit at your disposal.
7. Maintain accurate records. Good recordkeeping and documentation will be critical at tax time. Maintaining accurate records also helps protect your business from fraud losses.
8. Monitor partners’ business credit. Construction is a collaborative industry. To prevent other companies’ financial troubles from affecting your projects and harming your credit, check the credit reports of customers, partners and suppliers before you agree to work with them.
Peace of Mind
Building and maintaining creditworthiness is an important objective for every contractor. Your business credit rating plays a key role in providing peace of mind to sureties, lenders, insurers and potential customers that your company is financially sound, reliable and trustworthy.