Not realizing there’s an alternative, many business owners use their personal credit to finance their company without an attempt at building business credit first.
However, using personal credit will place you and your assets at risk if your business experiences difficulties. Even if everything runs smoothly, using consumer credit for your business could result in you appearing over-extended and not able to obtain financing when you need it. The better choice for you—and your business—is establishing business credit.
Building Business Credit
Whether your venture is new—or an existing enterprise—establishing business credit is an important component of your company’s long term health and success. In fact, having good business credit is the lifeline of your business—enabling you to get financing, hire employees, and fund business expansion and future growth to name a few. During the earliest stages of building business credit, you should:
- Incorporate or form an LLC (Limited Liability Company) to establish your business as a separate legal entity
- Obtain an EIN (employer identification number)
- Establish and list a dedicated business phone line
- Open a business bank account in your legal business name
After completing the above, the next vital step is establishing business trade credit. Business trade credit is an agreement between you and your suppliers and/or vendors allowing you to purchase now and pay later. Trade credit is normally extended on net 10, 15, 30, and 45 day terms—meaning payment in full is due within those timeframes. When establishing business trade lines, it is important to verify that the supplier/vendor reports their trade experiences to business credit bureaus—like Creditsafe—otherwise your positive payment history won’t be reflected in your business credit score.
Establishing and Maintaining Business Credit
Commercial credit scores are used in business to predict credit risk. Just as a high personal credit score is desirable, a good business credit score helps you drive both revenue and growth.
There is no steadfast rule to improving business credit, but adhering to the following best practices helps ensure your business credit score reflects positively on your company:
- Pay on time—your payment history with other businesses has the largest impact on your business credit report
- Check your business credit report on a regular basis to make sure the information is correct
- Establish trade credit with businesses that report trade information to business credit bureaus
- Ensure your vendors are reporting your payments to the business credit bureaus
- Keep your debt under control
Business Credit—Fact or Fiction?
You may be thinking, I’m a small business and I know all my suppliers and customers, so I don’t need to keep checking my business credit score; or, I’ve been in business for over 30 years and have never checked a business credit report, and I’ve survived just fine; or, I’m a new business and I don’t need to establish business credit yet, maybe in a few years.
While the above was the case when business credit reports were delivered by the Pony Express and a luxury only the largest businesses could afford, today’s technology democratizes the entire process by providing instant access to ever-more-affordable business data. Now everyone—from the new mom ‘n pop bistro down the street to the multinational software corporation at the edge of town—can use commercial credit reports to make the best possible financial decisions for their business.
The fact remains, things change in an instant—especially in today’s fast-paced business world. With once venerable names struggling—like Sears, Kmart, and Macy’s—and others bankrupt—like Enron, Circuit City, and Ringling Bros—the days of relying on a firm handshake and a good reputation to seal a deal are over. Whether you’re a small or large, new or established business, regularly checking business credit reports—yours and suppliers/vendors—should become a routine part of your credit control process.