One of the most essential, and often misunderstood, aspects of running a small business is building a good business credit profile. Without a decent credit history, a business owner may have a hard time securing financing from lenders and investors who will consider a business’ creditworthiness before granting it a loan or a line of credit. Moreover, a company that has questionable creditworthiness may be limited in its dealings with other businesses, such as vendors who will be reluctant to extend credit for the purchase of equipment or supplies.
Though maintaining good business credit plays a vital role in the success and overall health of a company, many small business owners surprisingly are unaware of how to go about building it. Specifically, new business owners should be aware of the following points:
• Always keep business credit separate from personal credit. With financing so hard to come by these days, many business owners may find it easier to tap into their own credit and assets. But doing this could lead to future problems if either the business or the owner suffers a financial setback. Even where a business is being run as a sole proprietorship or a standard partnership (a setup by which the owners are personally held liable for all the business’ debts and business income is recorded on their personal tax returns) it is vitally important that business’ financial transactions are kept separate. This means maintaining a separate bank account, separate credit cards, and a separate place to keep financial records.
• Consider which business structure best suits the business and its owners. The various business structures will affect the tax status and personal financial liability of its owners differently. In the sole proprietorship mentioned above, there is little to no separation between the business and its owners, whereas with a limited liability company (LLC) or a corporation, the business takes on the status of a separate legal entity. In the later case, the creditworthiness of the business would not be adversely affected if its owners suffered an unexpected financial setback.
• Business owners should monitor their reports with the major credit reporting bureaus. In the U.S., there are currently four major credit reporting bureaus: D&B, Experian, Equifax and TransUnion. Banks, credit card companies, utility companies, as well as thousands of other businesses all report billing and credit information to these organizations that is then used to produce reports and credit scores. This data can then be accessed by a third party to determine a business’ credit-worthiness or financial stability. Business owners should thus make it a point to regularly monitor the information that is posted about their company, and they should keep in mind that mistakes on a business credit profile are harder to change than it is for a personal account.
• Seek out business transactions that can improve a business credit score. Not every vendor or business reports payment information to a credit bureau. Currently, there are approximately 500,000 vendors in the U.S. that provide business credit, yet less than 6,000 report that information to the major credit reporting bureaus. Aside from utilities companies and the like, business owners should find out which businesses report to the credit agencies and be extra vigilant to pay any outstanding accounts on time.
• Research business credit cards before applying. Those looking for a business credit card should make sure to read the fine print on a business credit card application before applying. A credit card that reports only to a personal credit profile is not considered a real business credit card. Another factor to consider is that there are currently about 500 business credit cards available in the U.S., yet less than 70 of these cards will report a business’ payment history to the credit bureaus.
In short, with a little effort and know how, business owners can build a good business credit profile and go a long way towards maintaining the health and success of their businesses.
Gary Barzel is the manager of business development for Fastupfront. Fastupfront offers alternative business loan financing for existing businesses in need of working capital.