Get the best bang for your buck — and the lowest rate for bucks your business borrows
Everyone knows their personal credit score is an important part of their financial portfolio and future outlook. Credit scores determine how much credit lenders will extend and how much interest they will charge for the privilege of borrowing, and can be used by others to determine whether or not they are willing to get involved in various business arrangements. Credit scores are a measure of financial trust, and they can have a big impact on financial possibilities.
The same is true of credit scores for your business, but boosting your business credit score can be trickier than fixing your personal score. Though the two work in very similar ways, there are some key differences you should be aware of in order to make the most of your business credit.
“The mistake many business owners make is using their personal information to apply for business credit, leases and loans,” says small-business credit consultant David Gass. “By doing so, they risk having a lower personal credit score. At the same time, by using their personal credit history to get business credit, they’re not able to build their business score, which could help them attain critical business credit in the future.”
You want your business’s finances, including its credit accounts, to be as separate from your personal finances as possible. Both your business and your own personal money and financial profile are better protected this way, and each is able to grow more effectively when they’re on their own. Keep your personal accounts personal, and find the right lenders for your business separately.
“Establish business credit with companies that report trades,” say the credit-score makers at Experian. “Remember, not all business creditors report their trade information. Experian requires minimum information to generate a score. So if a business doesn’t meet these requirements, a score is not generated. Minimum information is at least one trade line and/or one demographic element.”
So even if your business has an excellent track record for using credit, paying back loans on time or early, never making a late payment and generally being a stellar borrower, it won’t affect your business credit score in the slightest unless your lender is reporting this information to the relevant agencies. Make sure the credit your business is using is being reported, otherwise, it won’t help you in establishing a solid reputation and securing future credit.
“If you are a sole proprietor, consider incorporating your business,” recommends Caron Beesley, a small business owner and advisor. “This will legally separate your personal finances from those of your business so that you can build a separate credit history. Next, apply for a tax identification number from the IRS. You’ll use this to file your taxes as an incorporated business and to register your business with credit bureaus such as D&B [Dun & Bradstreet].”
Take these steps, and then treat your business credit just like your personal credit. Pay early, pay often and only borrow what you need. Once you have your business credit established separately from your personal credit, keep it growing by being responsible. The dividends it will pay down the line are well worth it.
