Credit is your ability to borrow money (or get something and pay now). You are probably familiar with the concept when it comes to your personal credit scores, but the credit for your business is separate from your personal credit – at least it should be.
If you run a business, get familiar with business credit and start building so you can leave personal credit out of the equation.
Why use a business loan?
You can borrow money as an individual, so why go into the problem of borrowing on behalf of your business?
Keep things separate: Even if it’s not a big deal right now, you’ll be thanked once for separating your personal and business finances. To get a loan as a new job, you will probably need to apply using your Social Security number, which means lenders are pulling out your personal credit reports to determine your credit. It also means that all the problems will go to your personal credit reports – which will make it difficult to borrow for important purchases like home or car.
Even if all goes well, loans for your business can eat away at your ability to borrow as an individual, and this will affect you and your family. Loans estimate how much you can borrow based on your income and your existing debt payments (using the debt to income ratio). You can easily get the most if you borrow for business.
Until you establish a business loan, lenders will require a personal guarantee, even if they approve a “business loan”. You will need to put funds such as your home on the line, and these funds serve as collateral for the loan.
This can lead to disaster, making it difficult to move or refinance while your business loans are still outstanding.
Better Conditions: A solid business credit score makes it easy to work with. Suppliers are likely to allow more repayment time, and you will have more choices – you can work with high quality, trusted firms instead of whoever takes you as a buyer.
Better financing: When you borrow, you pay less if you have good credit for the business. Loans are usually risk-based. The more likely you are to pay, the lower your interest rates and other financing costs. It improves profitability and provides more breathing space.
Increased sales: Your credit is not just about borrowing – it can also impress potential buyers. Customers want to know whether or not you can deliver your orders, and the credit score of your business is one way to evaluate your operation. If you always follow up for vendors, customers are pleasantly placed in the big order.
Unlike your personal results, anyone can see your business loan – it’s not confidential and doesn’t need a reason to set up.
How to Build a Credit?
Building a business loan is similar to building a personal loan – paying on time – with some additional aspects.
Become legitimate: To start a credit business profile, you really need to have a business. Do everything you can to separate your personal and business affairs.
- Get an Employer Identification Number from the IRS, and use that instead of SSN in business situations
- You may need or want to get involved – talk to a lawyer to find out what’s best
- Create accounts on behalf of your business (some banks offer free business checks to get you started)
- If possible, get a credit card, small loan, or credit line from your bank on behalf of your business
Get Credit: “Credit” doesn’t have to be a formal loan – you can also get (and build) credit with associates with suppliers. When you buy on credit, you will receive goods and services today, but you do not have to pay until later. That model applies to a number of services, including office supplies and storage. Whenever you can pay within 30 or 60 days, you get a credit.
If possible, work with suppliers and partners who apply for your credit cards with business credit bureaus. Even if they do not report, it is possible to add these trade lines as “references” to your report .
Always pay on time and pay early for potentially better results – score is based on how fast you pay, with a slight bang for quick pay.
Providing information and monitoring: Building a business loan is not easy. You may need to provide information to credit bureaus, and you will certainly want to make sure they have the correct information about your business. Periodically review your credit reports and fix any errors you find.
Business credit bureaus
Depending on your definition, there are dozens (or more) of individual credit bureaus that cover everything from your borrowing history to your medical history.
Each bureau has its own scoring model, and everyone uses different information. Here, business credit scores differ from individual credit scores – individual credit scores are similar (though perhaps not identical) based on your payment history, public records, and other information. Even custom models will put you in more or less the same categories from lender to lender.
With business credit scores, information comes from completely different sources.