It’s practical to learn how to establish credit for your business. However, before you start applying for loans, weigh the costs as well as the impact on your business. Once you are approved for a loan, there is no turning back.
Planning is crucial when it comes to operating with loans. You should consider how it will benefit your business and how you will make payments. Keep reading for a breakdown of business credit: its purpose, how to get it and the benefits to your business.
So what is business credit?
Similar to personal credit, business credit refers to the credit you can get to fund purchases. In a business, this might include financing and loans for inventory, equipment, or supplies. When you establish a good credit rating in your business, it will be easier for you to borrow money when your business needs it.
Poor credit scores may limit your ability to secure contracts. You could face higher loan interest rates, limiting your company’s growth opportunities. But a solid business credit file can put your potential clients, lenders, and suppliers at ease.
What is the purpose of business credit?
The credit of your company can impact many areas of your business, including:
- Your loan eligibility or interest rates.
- Insurance premiums.
- Vendors and suppliers’ net conditions and credit limits.
- Your ability to raise money with potential investors.
- Your eligibility to contract with other organizations.
Benefits of business credit
You will build your business credit over time. Your credit rating takes into account a variety of elements and is expressed in the form of credit scores for businesses.
Your business credit report is created when your accounts and payment activities are reported to business credit agencies. As a business owner, your personal credit file might also be taken into account.
Your company will benefit from a strong credit history in a number of ways:
- When borrowing money, you might be approved for larger loan amounts and lower interest rates.
- Business insurance may be less expensive.
- Suppliers might be open to offering your company better deals.
Ways to establish business credit
It doesn’t have to be difficult to establish good business credit, but it does take some planning and forethought. The sooner you start establishing your credit, the better. Here are a few tips to get the most out of your credit-building efforts.
- Set up a separate entity for your business.
Separate your personal and business expenses by creating credit cards, lines of credit, and bank accounts under your company’s legal name. This will simplify your bookkeeping and taxes. A separate business account will also help you establish a history with your bank. You’ll come to them as an existing customer if and when you seek credit.
- Register your business.
Lenders and potential business partners will need this information in order to examine your company’s credit history. Have your registration documents handy before applying for a loan.
- Request an employer identification number.
You’ll need this unique identifier for your company for the purposes of tax reporting. This data is also crucial if you want to convert your company into a corporation or if you want to open a bank account in your company’s name.
- Pay on time, every time.
By paying your bills on time, you demonstrate that you are trustworthy and capable of efficiently managing and repaying your debts. Late payments, even if only a day late, will have a negative impact on your business credit rating. Have a structure in place to make your payments on time every month. Prepay, or pay early, whenever possible.
- Monitor your credit.
Mistakes happen. Keep clear records and check your business credit reports on a regular basis so you can catch errors early. If you see something that doesn’t match, register a complaint with the reporting agency.
The bottom line
Just like your personal credit score, it’s important to build and maintain healthy business credit. By making good choices, you can develop a credit rating that will allow you to get the funding you need to grow your business to the next level.
Start early and keep consistent in your credit-building efforts so you keep your financing options open.