Business Credit – How Does it Work?
If you’re a start-up company, chances are you’re going to be falling back a lot on your personal credit in the early days of your operations. And while that’s perfectly normal, your goal as a business owner shouldn’t be just to grow your business over time but to grow it in a way that you can also build business credit.
What is it though? It’s similar to your personal credit score, except from a business perspective. For instance, while your personal credit score is important, your business score should be kept separate in order to increase your company’s financing ability and credit capacity. This helps a business acquire the likes of equipment, office space, loans and financing and anything else that is pertinent to current and future operations. And it’s important to build business credit because starting a business can be a real struggle at times, potentially exhausting any personal credit options. By building a good business FICO score, you’ve now got another avenue to draw from.
We already mentioned how it works very similarly to personal credit. So in order to build it, you’ll have to borrow money, repay the borrowed money responsibly and make sure that the payments are reported to a credit reporting bureau. But just like your personal credit, your business score isn’t something that’s built overnight. In fact, just like your personal score, one of the key factors that lenders often look at when analyzing what type of a borrower you are is the length of your credit history. That’s why it’s important to begin to establish business credit immediately after you start your company.
As a reminder, your business credit is not the same thing as personal credit, so don’t treat them the same way. Apply for business credit under a Tax Identification Number, not your personal social security number, and make sure you’re meeting all the federal and state guidelines for operating a business within a given area. One other thing that can help your business score is incorporating your business. Incorporating helps limit personal risk, which can make you a more qualified borrower and increase your credit score. It’s not uncommon for many businesses to incorporate as part of a credit repair plan.
There are three big benefits of business credit: a big credit capacity, to increase company value and to protect your personal credit. Here’s a closer look at these three key benefits:
- Large credit capacity: It’s estimated that successful businesses can have up to 100 times more of a credit limit than a personal credit score. This alone gives a company a lot of latitude to pursue new ventures and increase revenue within the business.
- Increase company value: The better the credit score, the more attractive a company becomes, not only in terms of increased revenue but in terms of how it looks to potential investors and potential buyers.
- Protect personal credit: As previously noted, being able to rely solely on your business credit for company matters helps protect your personal credit score, keeping the two entities separate. It’s not uncommon for new businesses to rely on one’s personal credit in the early days until an adequate enough amount of business credit can be built, but ideally, there’s a separation of church and state between a personal credit score and the business part. It’s best for business owners and the business.
Tips-Build Business Credit.
So now that you know a little bit about business credit and why it’s important to build it, just how can you go about doing it? Here’s a look at some tips and pointers for getting your business credit score up:
- Start a business bank account: One of the first things you should do as a new business is open up a bank account. Banks report to the credit bureaus, so it helps start a line of credit. And opening up a business account will help you keep business and personal matters separate.
- Don’t let your personal credit score slip: Business and personal credit scores are not the same, but you still shouldn’t let your personal credit score slip. That’s because in the early days of your company when your credit is still being built, it’s likely that you’ll be viewed as more of a high-risk borrower when applying for loans. Because of this, it’s not uncommon for the bank to grant the loan and rest liability with the owner on a personal basis. In order for a bank or lender to do this, the personal credit score needs to be adequate. So it’s important not to give up on the personal credit score, as in such cases it’s important to also build your credit for your business.
- Be responsible: Responsibility is the key to building good credit. Make sure all bills are paid on time; monitor your credit score as you begin to grow it; and even consider consulting with a credit expert to help you and your business in the early days.