Understanding the Importance of Business Credit
When starting a new business from scratch, there are several factors you need to consider from marketing materials and hiring employees to selling products and saving money, that your business’ credit could easily take a backseat on the priority list. However, maintaining your business’ good credit is extremely important when it comes to building a successful company.
What exactly is business credit?
Much like your personal credit, your business’ credit score determines whether your company can be trusted when it comes to handling money. Think of your business’ credit score as a gauge for the reputation of your company. Among other factors, it reveals any sign of your business’ delinquent payments or bankruptcy, which could affect your chances of landing future business relationships. If your business has poor credit history, potential lenders or investors may not want to partner with your company because it would be considered a high risk endeavor.
So why is it important to build business credit?
While you may have excellent personal credit, you won’t want to put a loan for your business in your name for liability reasons, as you could become responsible for your business’ debt. There is always a chance that your business could hit hard times, and if your business cannot repay the loan, you don’t want that debt reflected on your own personal credit report. Not to mention in some extreme cases, the creditors could go after your personal assets if you filed the loan in your own name. Therefore it’s best to build business credit, and then apply for business loans with your company’s credit report instead.
The better your business credit the more financial opportunities your business will receive. For one, if your business has good credit history, lenders will be more likely to loan your business money. Not only will lenders trust you to repay them, but they will generally offer you lower interest rates than if your business had bad or no credit history. With access to loans, your business can borrow money to invest in a new product or electronic equipment, which it might not otherwise be able to afford out of its own pocket.
In the same way that lenders won’t mind engaging in business with your company, investors and partners may be more inclined to invest in your business as well. Your business’ credit score will prove that your company is reliable.
Additionally, good credit creates a safety net for your business. You may not need extra money now, but what if sales drop next month? Can you still pay your company’s rent? Will you have enough money to cover your employees’ payroll? If your business has already built good credit, then your business should have no trouble borrowing money during a financial bind.
How do you build business credit?
Now that you understand the importance of good business credit, the following are just a few simple steps, which can help your business build credit.
1. Form a Business Entity
To begin, your business must have a legal business entity, such as a corporation or LLC, which will allow to you to build your business’ credit separate from your own credit.
2. Apply for a Tax Number
Next, your business needs a tax ID (EIN), which you can receive through the IRS website. This tax number lets your business create a business bank account.
3. Set up a Business Bank Account
You’ll need a business bank account in order to apply for a business loan, so your next step should be setting up at least one account for your company.
4. Register with Business Credit Bureaus
Your business entity and EIN also allow you to apply for credit file numbers with business credit bureaus. Many businesses register with Dun & Bradstreet, which is the largest business credit bureau in the United States. Because Dun & Bradstreet is one of the top three credit bureaus, a business profile with the company is considered necessary for your business’ success.
5. Ensure that Vendors Report Your Business’ Credit History
If the companies you work with don’t report your business’ payment history to the credit bureaus, then there’s no proof of your financial responsibility. Check with the companies that grant your business credit to make sure that they are sending your good credit for the bureaus to track.