Having good credit is vital to any business, so it’s vital to start building yours from the moment you decide to start your business.[cite::219::cite] But, because business credit is different from personal credit, you’ll need a strategy. That starts with an understanding of what business credit is all about.
What Is Business Credit?
Business credit is debt funding that's distinct from your personal credit, and it’s in the name and tax identification number of the business. Your business borrows money from a lender or other creditor, and you agree to repay it on behalf of your business, usually with interest, at a later time. Term loans, tradelines, service contracts, lines of credit, equipment loans, and business credit cards are all types of business credit.
Whenever you borrow money on behalf of your business, you’re getting debt funding.
That’s not necessarily negative, provided you use the funds wisely and repay loans on time.
Debt is a way to leverage a lender’s money for your business objectives and wise investments while maintaining complete ownership.
What Are Some Purposes of Business Credit?
Operating or growing your business are the primary reasons for getting business credit.
Buying supplies, equipment, or inventory or developing a new product or service are common uses, too. So is borrowing funds to use as working capital to cover payroll or other short-term deficiencies. Loans can also be used for certain types of investments, provided the returns on a given investment will outweigh the loan's interest costs.
By repaying all loans on time, you build a good business credit history and business credit score. Once you establish creditworthiness, you can use it for other business needs. Good business credit for larger loans at lower interest rates helps keep your business moving in your desired direction.
Why Is It Important for Your Business to Have Good Credit?
Having strong business credit may be an indication of good character and trustworthiness, which can help your firm secure bigger contracts from clients, vendors, and potential business partners. Usually, it’s customers you’ve already worked with who’ve checked your business credit and trust you can fulfill their order.
For those whose business cash flow, not borrowing, is the source of operational or expansion funds, you still need good business credit. It may assist you in getting a large client that sees your good business credit as a sign of reliability and trustworthiness. It may also convince prospective partners to decide to work with you.
How Do I Establish Good Business Credit?
Initially, you must have good personal credit to get business credit. That’s because you’re more likely to have an established personal credit profile than a business credit profile, which takes years to build.
In the very early stages of starting and growing your business, you may need to use your personal assets as collateral for larger loans and be personally responsible for business credit in all cases. You’d be signing a “personal guarantee” of business credit, which affects your personal credit and could cost your assets if you don’t repay.
Your ultimate goal is having only your business’ name on credit account. To get to that point, you should do the following:
- Launch an entity for your business like an LLC, S-Corp, or C-corp, get an EIN and DUNS number, and open a business bank account using the entity and its EIN. This helps you avoid personal liability for loans.
- Set up a business address, phone number, and website with a business domain name to use for business email.
- Keep business and personal funds separate, using business banking accounts to pay business expenses, and set up accounting for the accounts.
- Have all payments to your business made payable to the business.
- Open tradelines under the business’ name and tax ID, make every payment on time and make sure they get reported to business credit reporting agencies.
- Establish a relationship with a local bank, because they can help you grow and get funding when you’re ready.
- Monitor and correct your business and personal credit reports and scores regularly.
If you operate as a business and work on building your business credit, you’ll soon be getting business funding in the business’ name, no personal credit required. If you follow the steps above, your business could be on the way to financial success.