Credit is your ability to borrow money (or buy something now and pay later). Credit for your business should be separate from your personal credit.
If you run a business, you should be familiar with your business credit, and start building it separately from your personal credit. So why go to the trouble of borrowing in the name of your business if you can borrow money as an individual?
Keep your business finances separate from your personal finances.
To get a loan as a new business, it is preferable to use your registered company name and corporate account name for applying. Lenders can decide to carry out credit checks on your personal credit profile on their own will to assess the loan risk. Any problem that might arise with the business loan will not go on your personal credit reports.
Applying for your business loan with your personal credit history bites into your personal credit and affects your ability to borrow as an individual – making it more difficult to borrow for important personal purchases like a home or automobile.
Lenders evaluate how much they can borrow you based on your income and your existing debt payments (using a debt to income ratio). You can easily get maxed out if you use your personal credit profile to borrow for business.
However, until you establish your business credit profile, lenders will require a personal guarantee, even if they approve a “business loan.” You will need to put assets such as your home on the line, and those assets serve as collateral for the loan.
This can lead to personal problems, making it harder to move or refinance your personal needs while your business loans are still outstanding.
Establish a Business Credit Profile to Earn Better terms
Building a solid business credit history makes it easier to operate. Start with taking small business loans that you pay back within short periods Suppliers are likely to allow more time for repayment, and you will have more choices to build your credit profile – you can work with high-quality, dependable credit firms instead of whoever will take you as a customer.
When you apply to borrow a business loan, the pricing is typically based on the risks associated with your business and its cash flow. The more likely you are to repay, the lower your interest rates and other finance charges. Getting a business loan with low interest improves your business profitability and provides more breathing room to grow.
Your business credit is not just about borrowing – it can also impress potential customers. Customers want to know whether or not you can deliver on their orders and being able to get the capital to increase your stock helps you increase sales as customers are more comfortable placing a big order.
7 Steps to Improve your Business Credit profile and Increase Access to Credit
- Building business credit is similar to building personal credit – pay on time – with some additional aspects.
- Get legitimate: to start a business credit profile, you’ll need to actually have a business registered. Do everything you can to separate your personal and your business affairs.
- Get a Tax Identification Number (TIN) for your business. You may also need or want to incorporate – speak with an attorney to learn what’s best.
- Open accounts in the name of your business (some banks offer free business checking to get you started)
- Get credit: “credit” doesn’t have to be a formal loan – you can also get (and build) credit by working with suppliers registered with the credit bureau. When you buy on credit, you get goods and services today, but you don’t have to pay until later. That model applies to numerous services including office supplies and warehouse space. Anytime you can pay within 30 or 60 days, you’re getting credit. If possible, work with suppliers and partners who report your credit to business credit bureaus.
- Provide information and monitor Building your business credit is not exactly effortless. You may need to provide information to the credit bureaus, and you will certainly want to make sure they have accurate information on your company by carrying out a Self-Enquiry. Review your credit reports periodically and fix any errors you find. You can subscribe to CRC CON-Plus to receive monthly notifications on what is reported about your business to the credit bureau.
- Choose Lenders Strategically
The right kind of business credit can help you build a better credit history so you can qualify for future loans on better terms. Certain types of business financing won’t help with that.
For example, merchant cash advance providers and other alternative lenders typically do not report to credit bureaus. So they do not help your business become more qualified for lower-cost financing in the future.
Borrow from a lender that can help you achieve your business’s strategic goals — not just meet your near-term money needs. Luckily, with today’s online lending platforms, you have access to one-stop shops for applying to multiple lenders.
When choosing a lending marketplace online, be sure to also ask if they are registered with a credit bureau that they submit credit data to. This way you can not only get the loan to improve your business, but you also get to improve your business credit profile and increase your access to better financing in the future.