How to Build Excellent Business Credit
Credit plays an important role in many businesses. Whether it’s used to finance operations during slow stretches or to fund an important expansion or new project, accessible credit is often vital for business success.
As important as credit is, it can sometimes be difficult to get. That’s why it’s so important that a business maintains excellent credit. Most individuals know the basics of building excellent personal credit.
However, many business owners can be confused by how to build excellent business credit. Fortunately, business credit and personal credit have much in common. Just like individuals, it’s important for businesses to make payments on time, use debt responsibly, and not overextend themselves.
Business credit and personal credit history
One of the keys to building business credit – and protecting your personal finances – is to separate your business and personal credit. Many business owners make the mistake of financing their business with personal credit cards and loans. They may even use personal assets as collateral to finance their dream.
If you’re late on bills for your business, does that count against your personal credit score?
Being late on your business bills can impact your personal credit if your business and personal credit are intertwined. Too few business owners take the appropriate steps to separate their personal and business credit when they launch their company. Many business owners have used personal credit to obtain financing. While that is understandable, it can create problems down the road if your business runs into financial trouble.
If your business and personal credit intermingled, your business financial decisions will impact your personal credit. That could affect your ability to get a loan or could negatively impact the interest of any loan that you are able to receive.
Not separating your business from your personal credit is a mistake for two reasons. First, using personal credit to finance business doesn’t allow your business the opportunity to build a credit history, which is necessary to access credit in the business’s name in the future.
More importantly, though, using your personal credit for the business puts your personal assets at risk. If the business should fail, creditors will be able to pursue all of your personal assets to satisfy debts.
How to separate your business credit from your personal credit score?
Separating your business from your personal credit is simple. If you follow these easy steps, you’ll be on your way to building exceptional business credit.
1) Incorporate the business. The first step to building business credit is to create the business as its own entity. You can do this by filing for C-Corp, S-Corp, or LLC incorporation. LLC stands for Limited Liability Company and is a popular choice for many business owners because of its simplicity. It allows you to keep the business’s finances and credit separate from your personal finances, while still filing your personal and business income taxes together.
2) Obtain an EIN. An Employer Identification Number (EIN) is like your business’s Social Security number. It identifies your business on any credit applications and is how lenders and credit agencies are able to search your business’s history.
3) Open bank accounts under the new EIN. If you have a legally recognized business entity, you should keep that entity’s assets separate from your personal accounts. Open a checking account and savings account. The savings account will come in handy as collateral when you apply for loans or lines of credit.
4) Apply for vendor financing. This is an easy way to build quick credit. Most vendors have some kind of financing program to facilitate larger purchases and many don’t have strict requirements.
5) Apply for a loan or line of credit. Ask the bank where you opened your accounts to establish a line of credit. If they need collateral, you should be able to use your business savings account. Again, don’t use personal assets because they then become exposed to creditors.
6) Pay on time and don’t take on too much. The most important step in building credit is to be a good borrower. That means paying on time and keeping your balances low. Don’t use all of the credit that is extended to you. A good rule of thumb is to keep balances on things like credit cards and lines of credit at 50 percent or less of available credit.
If you follow these steps, your business should have built strong credit quickly. That credit, if used responsibly, will help you build and grow your business to its full potential.
Author: Marc J Marin