Establish Business Credit to Finance Your Business
New businesses must usually use personal credit as they are starting out. But using your personal credit for business can be a problem, for several reasons:
- Your personal credit may not be good enough to get a business loan or line of credit. Business credit standards are higher, particularly in these difficult financial times, so using personal credit may not be the best way to get funds for your business.
- Using personal credit for business can put your personal credit in jeopardy. If your business fails to pay back its bills, your personal credit rating can be affected.
Benefits of Using Business Credit
Consider the 4 C's of Credit (Character, Capacity, Capital, and Collateral) and how they can help you get a business loan more easily with business credit:
Character Character relates to how good a "financial citizen" the person or business is. If you build up good business credit, your personal credit "character" won't be as much of a factor in finding funding.
Capacity relates to the ability of the entity to pay back the funds through operations. The longer you are in business, the more you can show your capacity for paying back the money you owe. The operations of your business can help you achieve a high business credit rating.
Having capital (cash and other assets) is important to getting a business loan. Building up capital by running your business efficiently and buying assets will help you secure more business credit.
If you can use business, rather than personal assets, as collateral for your business loan, you will be able to keep your personal assets less at risk. You can also avoid the problem of having a personal guarantee for the business loan.
How to Establish Business Credit
As soon as you start your business you should work on getting a business credit record. Here are some suggestions for building up your business credit:
- Get a business credit card and use it for your beginning business purchases. Pay off the balance each month, if you can.
- Establish trade credit with vendors, for equipment and office supplies for example. Pay off these accounts promptly.
- Get a bank account and operate your business as a "real" business, paying bills through this account rather than your personal account.
- Set up a formal business type, such as a limited liability company (LLC) or a sub-chapter S corporation, so it is clear that your business is a separate entity from your personal finances.
Savings from Using Business Credit
Establishing good business credit can save you money in several ways:
- Good business credit can save you money in interest expenses. If you have a high business credit rating, you can qualify for lower-interest loans from banks and other lenders. Over the life of a loan, the interest savings can be substantial.
- Good business credit can help you get the lease on a new office or a mortgage on a building. A property management company will ask to see your credit report, and they may not rent to you if your credit rating is low. Like banks, they don't want to take a chance on a poor credit risk. Vendors like equipment manufacturers and office supply companies also may ask for your credit rating.