Many business owners do NOT know that business credit is completely different than personal credit. Many small business owners currently use their personal credit to run their day-to-day business operations.
However, there are multiple risks in doing so. There are many creditors and lenders who have moved away from looking at business owners’ personal credit because it is not a standalone piece of evaluation for future business behavior.
Your personal credit is linked solely to your Social Security Number (SSN). When you establish business credit, it is instead linked to your company’s EIN, or Employer Identification Number. Just like personal credit, it may take a considerable time to build over time.
By building stronger business credit, you can:
- Protect Personal Credit – It is important that you do not allow your personal credit to dictate your business needs. Your personal debt, credit cards, and assets will then be linked to your company, putting you at a higher risk if your business were to have financial problems.
- Greater Credit Capacity – Businesses have the potential to have 100 times the amount of credit capacity than personal credit. When your business can be trusted by lenders, they are more likely to offer you financing and loan options to expand your company needs.
- Better Company Value – When creditors and lenders trust your business, your company becomes more valuable. If you were to sell your business in the future, your company looks far more attractive to potential buyers and/or investors.
Building a better rating can later help secure lines of credit, lease equipment for your business, and acquire business credit cards and loans.
But how do you build small business credit…? Here are four steps to help:
1. Separation of Personal/Business Funds
As I stated earlier, it’s extremely important to keep your personal and business credit as separate entities. This is also imperative in relation to bank accounts and credit cards. Opening a business bank account will help build your business credit and make tax time far easier!
2. Credit Bureaus Reporting
Many companies do NOT report payments to business credit bureaus. Asking your vendors to do this for you can create unneeded stress. When you report your payments (and pay on time!), this will help in building your credit history as well as improving your overall business score.
3. Form an LLC
LLC stands for Limited Liability Corporation. This combines the taxation of a sole proprietorship (or partnership) with the limited liability of a corporation. If your business is a sole proprietorship, it may be consistently more difficult to keep personal and business finances separate. An LLC may create a better structure for separation and securing finances.
4. Check Business Credit Quarterly
Check your business credit quarterly with all THREE national credit bureaus within the U.S. (Experian, Equifax, and TransUnion). These companies have systems/data in place where they can store and report credit histories for businesses like you. If you notice errors/problems within your reports, make it a point to correct these mistakes. You can also see why and how your credit score may be declining – are you making your payments late? Have you maxed out your business credit card? Some lenders and loan companies will give you access to a free business credit score.