Most businesses depend on credit to grow. From time to time they need loans for working capital and to buy cars and trucks, equipment and machinery and more. Many owners rely on their personal credit, taking cash advances from personal credit cards or tapping into their home equity, to meet their business’ needs.
Relying on only this avenue of credit is short-sighted and can be downright dangerous. By using personal credit, a business does not build up its own credit. And mismanaging personal borrowing can adversely impact an owner’s personal credit score. A better way is to cultivate business credit.
What Is Business Credit?
Business credit is a history that reflects a business’s activities. Unlike consumer (personal) credit that can be boiled down to a FICO score, business credit is not a single number. Business credit history includes payment experience (whether a business has paid its bills on time or has been late, and how often), judgments against the business, bankruptcy filings by the business in the past, various business information (location, fictitious name, industry classification, etc.) and prior credit inquiries about the business, among other factors. The owner’s personal credit history is not part of business credit.
Business credit is used by vendors and lenders to determine whether they will lend to your business and on what terms. The better your credit history, the more likely it is that you’ll obtain the loans you need and on more favorable terms (i.e., lower interest rates).
What does your business credit history look like? If you don’t know, you can learn where you stand now in terms of eligibility for obtaining financing by using a free tool from BusinessFundability.
There are two basic ways to build your business credit.
Passive business-credit building. This is nothing more than following good business practices, such as paying your bills on time, avoiding lawsuits and managing business credit wisely (not overextending the company).
Active business-credit building. This requires some effort on your part. Because only about 5 percent of the companies you do business with regularly report to business credit bureaus, your credit history would not normally include the breadth of bill paying activities. Utilizing proactive credit building services from the business credit bureaus or other companies enables those you do business with to report to a credit bureau so that you have stronger information in your credit history.
Building business credit is not a one-shot activity; it requires continual effort. For example, you may want to use credit-monitoring services from a business credit bureau to stay on top of changes to your credit history and learn of inquiries about your credit history.
It's important to devote attention to building business credit, which will allow you to enjoy the following benefits.
- It will create a valuable asset for the company. This asset belongs to the business, not the owner, and can enhance the sale price of the business down the road.
- It can lead to greater borrowing opportunities on more favorable terms. Interest rates won’t always be as low as they are now, so the ability to obtain better rates may be even more important in the future.
- It can eventually relieve you of any personal liability for business debts. While you’re building business credit, you likely still have to give your personal guarantee on loans to the company. However, with ever-growing credit, your business may mature to the point at which you no longer have to guarantee business loans so that your personal assets are not impacted by what happens in or to the business.
As Benjamin Franklin said: “Remember that credit is money.” Make yours grow.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.
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