When you shop for small business electricity, your small business credit is a factor in getting your service set up. The unfortunate reality is, you may have to pay a deposit to start electricity service for your small business. That’s why it’s important to build small business credit. In this article, we’ll explain why you may have to pay a deposit, alternatives to pay a deposit, and how to build small business credit so you don’t have to pay a deposit.
Why You May have to Pay a Small Business Electricity Deposit
Electricity is a post-paid service. That means that your Retail Electricity Provider (REP) will arrange to have power flow to your business location, and collect money after you’ve received and consumed the electricity. In Texas, because the REP performs the billing function, they are also on the hook for paying the delivery fees to your local distribution company or utility (usually before you even pay your bill).
Regulations in Texas require that customers get 16 days to pay their bill. If the customer doesn’t pay the bill, the retailer can issue a disconnection notice which gives the customer another 10 days before the REP will actually disconnect power. All told, by the time a REP disconnects power for non-payment, they are on the hook for 1-2 months of electricity usage.
That’s why most REPs will run your credit and require a deposit if you don’t meet minimum credit thresholds. Just like your business can’t afford to give away free products or services, REPs can’t afford to give away free power The deposit is their guarantee that the bill will be paid.
TIP: To check your small business credit, the REP will need your Employer ID Number (Taxpayer ID Number) and/or your DUNS number. Make sure you have these available when you sign up for your small business electricity.
Alternatives to Paying a Deposit
There are alternatives to paying a deposit, especially if you are in Texas and meet the Public Utility Commission of Texas’ (PUCT) definition of small commercial:
“A non-residential retail customer having a peak demand of 1,000 kilowatts (kW) or less. For purposes of this section, the term small commercial customer refers to a metered point of delivery. Additionally, any non-residential, non-metered point of delivery with peak demand of less than 1,000 kW shall also be considered a small commercial customer.”
Peak demand is basically, the highest level of usage achieved on your electricity meter during the past 12 months. Meters are typically designated as small, medium or large commercial, which helps REPs price your electricity.
If your meter is designated as small commercial, you have many of the same rights as a residential customer. That includes alternatives to paying your deposit, such as providing a letter of good credit from your current REP.
Some retail electricity providers (REPs) let small businesses submit 1 or 2 recent electricity bills, showing good payment history. Good payment history means no late fees, no past due balance. Other REPs will allow a personal credit check and personal guarantee by the owner of the company. Some REPs will even base credit on your payment history on your residential account — it pays to check with your current REP at your home, to see if they offer a program like this.
Submitting bills as proof of good payment history is all well and good for an established business that’s looking to switch their small business electricity. But what if you’re a new business looking to set up electricity for the first time? That can be a challenge.
If you are a new business without established credit, or an established business with poor credit, you can expect to pay a deposit equal to 1/5 of your estimated annual usage. Deposits vary by provider, but could be $1 – $2000.
How to Build Credit for Your Small Business
Which brings us to the real focus of this article… how to build credit for your small business. It’s not just for electricity purchasing. Just like in your personal life, having good credit for your small business makes it easier and less costly for you to buy the things you need.
Here are some steps for you to establish good credit for your business.
- Incorporate your business. Even though you may be incorporated when you’re reading this, it deserves a mention. With sole proprietorships and general partnerships, the business is legally the same as the owner; therefore, there can be no separation of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s). This also protects your personal finances from your business’ debts and creditors.
- Obtain a federal tax identification number (EIN). The EIN is basically a social security number for a business. It is required on federal tax filings. You also need it to open a business bank account in the name of the corporation or LLC.
- Obtain a DUNS Number. A DUNS number (which stands for Data Universal Numbering System) is a unique 9 digit number assigned by the Dun & Bradstreet Corporation. Having an active DUNS number confirms your business is operational. Information on your business is included in an official directory listing that includes your company’s physical location, contact information, ownership, business structure, industry, employee count, aliases (“doing business as” designations), and historical financial data. If you have not yet established a DUNS number, here are the steps to do so.
- Open a business bank account. Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.
- Establish a business phone number and address.Whether you use a landline, cell phone or you use VoIP, have a separate number for your business and in your business’s legal name. List that number in the directory so it can be found, along with your address
- Open a business credit file. Open a business credit file with all three business reporting agencies: Experian, Equifax and TransUnion.
- Obtain business credit card(s). Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies. Pay your card on time to build your credit. Some credit card companies specifically focus on small business credit, and have special promotional offers.
- Establish a line of credit with vendors or suppliers. Work with at least four vendors / suppliers to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies. NOTE: Most REPs will not report your good payments to a credit bureau. REPs usually just report bad payment history.
- Pay your bills on time. Be sure to pay your bills on time. Like with your personal credit, late payments will negatively impact your business credit.
- Check your credit report. Just as with your personal credit, keep an eye on your business credit too. Check your report regularly with the credit bureaus, and report anything that is not correct.