Credit For Entrepreneurs: Building Business Credit And Avoiding Pitfalls

Building strong business credit is one of the most important factors for entrepreneurs looking to grow and scale their companies. Access to financing allows you to invest in inventory, equipment, marketing, hiring, and more. However, establishing credit as a new business owner can be challenging due to having no business financial history.

Understanding Business Credit

While personal credit looks at your individual financial responsibility and payment history, business credit evaluates how well your company manages financing and pays bills. It’s essential to distinguish these as having strong personal credit won’t necessarily translate to qualifying for business funding. Keeping finances separate avoids potentially mangling your personal file if your business experiences challenges.

Importance Of Building Separate Business Credit

Establishing an independent credit history for your company right from the start lays the groundwork for future growth. Lenders will want to see a demonstrable record of on-time payments made by the business entity itself before extending larger lines of credit. Starting early allows time to build those positive payment habits that prove your company’s creditworthiness.

Steps To Building Business Credit

Following are the steps you need to take to start establishing your company’s credit profile. This process builds your credentials from the ground up in a methodical manner.

1. Establishing A Legal Business Entity: The first step is legally organizing your business as some structure like an LLC or corporation. This creates the foundation for your business existence and credit history.
2. Obtaining An EIN: Your business must obtain an Employer Identification Number from the IRS to report taxes. This unique identifier is how your business establishes itself separately from your identity.
3. Opening A Business Bank Account: Open a dedicated business checking account to manage operational finances. Account reporting helps add positive credit data over time.
4. Securing Credit From Vendors And Suppliers: Look for vendors who offer net 30 or net 60 terms. Timely payments build your business profile within trade lines.
5. Applying For A Business Credit Card: Aim for a starter business card and keep the credit line low. Responsibly using and repaying this card develops your business credit scores.
6. Making Timely Payments And Managing Credit Responsibly: Set calendar reminders to pay all business bills on time each month without exception. This builds a strong payment history.

Common Pitfalls To Avoid

Avoiding common pitfalls will help ensure you construct a strong, positive credit history from the beginning.

1. Mixing Personal And Business Finances: This is one of the biggest no-nos. Keep funds and accounts completely separate. This protects your personal assets and allows for transparent financial reporting.
2. Failing To Monitor Credit Reports: Check business credit reports from Equifax, Experian, and Dun & Bradstreet regularly for accuracy. Early errors can be fixed before causing larger issues down the line.
3. Not Understanding Credit Agreement Terms And Conditions: Make sure to carefully read all paperwork and ask clarifying questions upfront. Avoid surprises by fully comprehending repayment obligations and fees.
4. Maxing Out New Credit Lines: It’s tempting but restrain from coming close to maxing available credit when first starting. Show discipline by keeping balances low relative to limits.
5. Defaulting On Payments: Set calendar reminders and automate transfers if possible. One missed or late payment could wreck your scores for years. Don’t let it get to that point.

Benefits Of Having Good Business Credit

1. Access To Financing Options: Lenders are more willing to provide loans, lines of credit, and financing programs to businesses with demonstrated creditworthiness.
2. Better Terms And Interest Rates: Strong credit means qualifying for the most competitive loan terms available like lower interest rates. This frees up more cash flow.
3. Improved Cash Flow: With more financing alternatives, you can better manage cash cycles and delay paying full costs upfront through favorable repayment schedules.
4. Ability to negotiate better terms with suppliers: Vendors will offer competitive prices, extended payment periods, and discounts knowing your business pays on time every time.
5. Enhanced Business Credibility And Reputation: Personal guarantees aren’t as relied upon because your company’s credit profile stands on its own merits. This impresses both lenders and clients.

How To Maintain Good Business Credit?

It’s essential to keep up strong credit management ongoing. Maintenance is just as vital as building credit in the first place.

1. Continuing To Make Timely Payments: Set calendar reminders to pay all bills on time, every time. Your history of ongoing on-time payments preserves your positive credit scores.
2. Monitoring Credit Reports Regularly: Check business credit reports quarterly from Equifax, Experian and D&B for accuracy and signs of any suspicious activity.
3. Being Selective With New Credit Applications: Only apply for new financing as needed to grow responsibly. Too many applications can signal higher risk.
4. Keeping Credit Utilization Low: Maintain low balances relative to credit limits, ideally below 30%. Lenders view heavy usage as a warning sign.
5. Communicating Proactively With Creditors: Contact lenders in advance if payments may be delayed to explore options vs. letting accounts fall delinquent.

Importance Of Separating Personal And Business Credit

Keeping your personal finances completely separate from business operations is crucial for several important reasons:

1. Protects Personal Assets: This separation prevents business debts, lawsuits or tax issues from endangering your personal property, home, investments etc.
2. Avoids Legal Issues: Comingling funds can risk piercing the corporate veil legally if problems arise. Courts may hold owners personally liable for company debts.
3. Enables Improved Financial Management And Organization: Having clear lines between personal vs. business income/expenses makes bookkeeping, tax filing, and decision-making more streamlined.
4. Simplifies Tax Filing: The IRS expects a division between the revenue/taxes of a business and its owners as an individual. Separate records are simpler for both parties come April 15th.

Alternative Options For Entrepreneurs With Limited Credit History

For new business owners just starting out who don’t have an established personal or business credit profile yet, don’t despair. There are still some viable options to begin constructing your financial reputation.

1. Secured Credit Cards: These require a security deposit but can help build business credit scores if used responsibly. Just beware of fees.
2. Personal Credit Cards For Business Purchases: Only do this temporarily until your business credit allows for commercial cards. Keep superb personal records.
3. Business Loan With A Personal Guarantor: Consider having an established personal contact like a family member guarantee the loan to boost the chances of approval.
4. Building Credit Through Trade Terms: Work with vendors offering 30-60 day payment plans and make timely payments to establish a business profile with them.

Resources For Guiding Your Business Credit Strategy

1. Credit Bureaus And Reporting Agencies: Regularly check business credit reports through Equifax, Experian and D&B to stay on top of your financial profile and identify any reporting errors that need correction.
2. S. Small Business Administration (Sba): Refer to the SBA’s extensive guides and resources on credit management best practices and financing programs they offer to support small business growth.
3. Local Small Business Development Centers: Take advantage of the free credit consulting provided by your state’s network of SBDC advisors. They offer industry-specific guidance.
4. Online Educational Tools: Simulators and tutorials can enhance your understanding of credit factors and helpful reference material when tracking payment behaviors over time.
5. Accounting And Finance Professionals: Consider working with an experienced advisor who can evaluate your unique situation and optimize strategies tailored to your business goals.

Conclusion

Taking the time upfront to properly build a dedicated business credit profile will pay huge dividends as your company grows and requires increased access to capital. With ongoing diligent credit management, your business establishes a stellar reputation that opens doors to new opportunities.