As a small business owner, your company’s financial profile is your most valuable non-tangible asset. In many cases it’s the final determining factor when striking new deals with vendors, banks, and potential partners. Unfortunately, many small business owners fail to realize the importance of their company’s credit score and end up relying too heavily on their own personal credit history to move their business forward.
This is particularly true for first-timers who tend to launch their start-ups solely on the strength of their own financial wherewithal. But leveraging your own credit history to drive your business’ future can only take you so far. Sooner or later you need to establish and build a strong credit profile for your business if you want the venture to be truly successful.
Why Your Business Credit Score Matters
We all know the importance of a sound personal credit history. Without it most of us would never qualify for a bank loan, a mortgage, or even a credit card. Your business’ credit score works in much the same way, giving you the financial power and flexibility you need to drive your venture to newer and greater heights.
A strong business credit score delivers a number of key benefits, including:
- approval for bank loans and lines of credit
- lower interest rates
- lower insurance costs
- approval for leases and mortgages
- better terms from vendors and creditors
Protecting Your Personal Assets
Another key advantage of building a strong credit history for your business is it allows you to better protect your own personal assets. No doubt when you started your venture you were expected to sign a personal guarantee when you applied to your bank for any loans or lines of credit. In effect you agreed to be held personally liable for any debt the business was unable to pay back. That put your personal wealth and assets at risk. The better your business credit score the more likely you are to qualify for a business loan without the need for a personal guarantee.
Checking Your Business’ Credit Report
Before you can begin building on your business’ credit history you need to know your current score. There are three major business credit bureaus to which you can apply to receive a full copy of your business’ credit report.
Keep in mind that credit bureaus are not required to provide free business credit reports. So, unlike a personal credit history search you may be be expected to pay a fee to receive your full credit history through one or all of these companies.
Establishing Your Business Credit
If your credit reports come up short don’t panic. It’s simply that your business hasn’t yet established enough of a reportable credit history. This isn’t unusual, particularly for smaller businesses and start-ups where the owner has been primarily using their personal credit lines to cover expenses. But it does indicate that you need to start building your credit history now.
In order to start building a sound credit history for your business you should start with the following steps:
- Either incorporate your business or form a Limited Liability Company (LLC). This is crucial to separating your business and personal financial identities.
- Apply for a federal employer identification number (EIN). This establishes your business identity with the IRS as well as the various credit bureaus.
- Open a dedicated business banking account using your legal business name.
- Secure a dedicated business phone line and make sure it is listed in the applicable directories.
These few simple steps will help you to establish a distinct credit profile for your business. Once you’ve accomplished that you can start building on, and improving, your credit history.
Building and Improving Your Credit History
Now that you’ve successfully established a distinct identity for your business it’s time to start building a solid credit history. Much of this is common sense, although a few of the tips we’ll be covering may not be as obvious as others. Taken together, however, they will all help you build a strong and valuable credit history for your business.
- Apply for a Business Credit Card – Having a dedicated business credit card with a lender that reports to the major credit reporting agencies is an easy way to start building up a sound credit history. It also helps to further separate your personal spending from your business expenditures. Keep in mind, however, that you will want to use your business credit card responsibly. Don’t over extend yourself and always pay your balance on time.
- Establish and Maintain Good Credit with Suppliers and Vendors – This is common sense but it bears repeating. Establishing good financial relationships with your major suppliers and vendors reflects well on your business and improves your credit profile.
- Partner with Vendors that Report to the Credit Bureaus – This is one of the less obvious tips we mentioned before. Vendors and suppliers are not required to report their clients payments to any of the major credit bureaus. Chances are you’re already working with one or two vendors who you pay on terms. Find out if they report to any of the credit reporting agencies. If they do that’s good news for your credit score. If they don’t, consider looking for new vendors who do report to one or more of the recognized credit reporting agencies.
- Pay on Time All the Time – This is rule number one whenever credit is involved. Paying your bills on time proves that you can effectively manage and pay off your business’ debts. Late payments will adversely impact your credit score.
- Pay Your Vendors Early – Paying your bills on time proves that you can handle your business’ finances in a responsible manner. That can boost your overall credit score. However, it’s a little known fact that some reporting agencies actually give better scores to businesses that routinely pay their debts off early. So, whenever possible, pay your vendors well before the due date.
- Monitor Your Credit Report – Any errors or fraudulent activity that appears on your credit report can definitely damage your business’ credit history. Left unchecked they can make it more difficult to borrow money at terms that are favorable to you and your company. Check your credit report a few times each year and take the necessary steps to dispute any errors or fraudulent activities that you find.
Bottom Line – Building Your Credit Score Takes Time
A strong credit history is critical to the success and survival of any small business. However, it takes time to build the type of solid credit profile that will pay dividends in the future. Now is the time to put your credit building plans in motion. Review your company’s current credit score and if you find it lacking follow the steps we’ve laid out here to help you build a credit history that will help you take your business to new heights.