Obviously, you know that each person has a credit history that is reflected in their personal credit score, but did you know that businesses have credit history as well? I’m not just talking about businesses that receive loans or capital from investors. Even small businesses with little fund have a credit history. So, how does a business go about building up credit history? Check out 4 ways to build business credit so your business can be in the best place to receive credit in the future.
#1 Make sure your personal credit is on point
This should come as no surprise to you, but if your personal finances aren’t in order, it’s very likely your business finances won’t be in order. Most times, when a business is new and seeking out credit, the lender will look at your personal finances to decide on giving credit. If you don’t have a good credit history on your own, there’s a real possibility that your business will be denied credit.
If your business is approved for credit, the lender may require you to be a personal guarantor. This means that if the business fails and goes under, you are still personally responsible for the debt. This is just another reason to make sure your own finances are under control.
#2 Keep business finances separate from personal
If your business and personal finances are merged, how will the credit bureaus, or any lender, determine what is what? There would be no way to determine your business payment history because it is lumped in with your personal finances. If you are serious about your business, you will want to keep your personal finances separate.
Open a bank account just for your business. Any income earned by your business should go to that account, and any expenses for your business should come out of that account. Don’t use your business account to pay for personal expenses. This will be very tricky to explain come tax time.
#3 Be smart with bank loans and credit cards
Just like you should be smart with personal loans and credit cards, you should also be smart with business loans and credit cards. Speaking from firsthand experience, it can be very tempting to use your available business credit on things that won’t result in income. This is not an effective use of credit. If you cannot get a return on what you spend on credit, avoid using it.
Also, be weary about using credit for advertising and marketing. Marketing can be a black hole. If you aren’t testing what is working, and just putting out ads, you may be disappointed with where your money goes. Make sure that anything you put on your business’ credit card can be paid off before interest is accrued.
#4 Start monitoring your business’ credit history
Did you know that your business can also have a credit report? If you have created a business bank account, separated yourself from the business, and have been using a business credit card, your business is likely building a credit history. Leverage the business search on Equifax or Experian to see if your business is being monitored for credit.
According to Wisebread, “There’s a different system for business credit card scores than for personal ones. Business credit scores go from 0 or 1 to 100. Each of the major credit bureaus uses its own formula, but factors such as how long you’ve been in business, your credit utilization, and the lines of credit you have opened in the last six months are likely to affect your score.”
Related: Finance 101 – Starting a Business
Just like your personal credit, it takes years to build up a good history and not much to ruin it. Be smart with the financial decisions for your business. It will pay off in the future. Do you have your own business? If so, how do you manage the finances? Share a comment below to get the conversation started!