How to Build and Maintain Great Business Credit

By on April 16, 2018

How to Build and Maintain Great Business Credit
No matter which industry you are in, you are going to need either a business loan and/or a line of credit for your business. While most business owners worry about their business credit, there are some similarities between personal credit and business credit. The key is to know where the differences are and how to manage them effectively.

7 Tips on Managing Your Business Credit

1. Create a Separate Entity for Your Business

Incorporation is one of the greatest tools the small business owner has to protect themselves from any unfortunate events. There are several different types of incorporation that exist, and you should read up on each to see which one fits your business needs. It will cost a filing fee to incorporate, plus potential legal fees for a lawyer to go over the paperwork, but you should consider doing it.
Once you incorporate, you can get an Employer Identification Number (EIN) from the IRS, which is essentially the business’s social security number. It is the number that the business will use to pay taxes, it will be on your employee’s W-2s, and it is the number that banks will use to open your various accounts.

2. Keep Your Personal Finances Separate from Business Finances

This is an area where a lot of small business owners fudge a little, and it’s only going to hurt your business credit building. Any time that you put a business expense on a personal credit card, you are affecting your personal credit rating, not the business’s rating. Also, when you apply for a larger credit line or a loan from a lender and they see that the business itself has not been buying or paying for everything that the business owns, they will have serious concerns about the ability of the business to repay the borrowed amounts.
The solution to this comes from proper prior planning. You can make a legal investment (including contracts and all other appropriate paperwork) into your business to cover planned expenses. For day-to-day expenses, you can cut some of your business costs by reducing your own pay, which is the same as you buying things for the business, but shows up better on the books. The money saved can then be used as a buffer to pay down existing debts or make needed purchases.
If you find yourself continually injecting money into your business, speak to a financial advisor or a business consultant to assist you with better income and expense forecasting.

3. Understand the Differences between a Business Loan and a Business Line of Credit

Business Loans are one time deals used when businesses either start or are going through a transition, such as growing or moving to a new location. Your business loan will be used to buy or lease your building, your capital equipment (office equipment, initial inventory and supplies, and/or production methods), and finance your employees until the business starts bringing in revenue. Loans will require a loan package with lists of specific costs and various financial projections going out several years, so it may be worth seeing a business consultant to help you prepare one if this is your first time starting a business.
A Business Line of Credit is a credit card that your business uses to make purchases for the day-to-day running of your business. It is typically used only by the owner, though additional cards can be ordered for additional employees to be able to make necessary purchases. Your business line of credit can also be a financial safety net if you are still expecting payment for completed work, but need to pay your employees’ salaries or vendors for new materials.
Let’s look at a plumber starting out as an example. The plumber will use the business loan to lease a workspace or office, purchase common use tools like wrenches, and a work truck or van to get to job sites. The plumber will use the business credit to purchase the pipes, fittings, and other items that they need for the specific jobs that they work while they await payment from the customer.

4. Use Multiple Sources for Financing

Just like you want your customers to only come to you when they need what you sell, your banker wants you to do all of your banking with them. Loan officers are tracked by how much business that they bring in, so they will offer lots of benefits to get you to open your business checking account, credit line, and business loans through them.
It is worth shopping around and spreading your accounts among multiple banks for several reasons. First, it drives competition for your business. A banker who knows that you have more money that you may need to borrow in the future will try to find you better terms or incentives for both your current and future needs.
Second, banks can change their lending policies. If a bank executive in an office on the other side of the country decides that the bank is now going to limit total lending amounts to businesses of your size, it doesn’t matter how good your relationship is with your local branch. Having relationships with multiple banks gives you an advantage if you have to secure additional credit for your business.
Additionally, other sources exist to help you grow your business outside of traditional lenders. Investor networks, collateral or accounts-receivable loans, and crowd-funding can also be viable sources of funding depending on your specific needs.

5. Pay Your Bills

This should go without saying, but missing even an occasional payment can be severely detrimental to your business credit. As a person, you probably have had personal credit for years, whereas your business is starting out as a new entity. With little or no business credit history, one bad mark stands out very clearly to your current and any future lenders. As you start establishing a good payment history, ask for higher credit limits.

6. Use Your Credit to the Advantage of Your Business

As you establish credit, be sure to keep using it. Even if your income exceeds your expenses, keeping an active credit account maintains your relationship with your lender for when you need to get a new loan to expand your business. Banks do not typically charge you for credit purchases if you pay them off the same month, so using your credit line to pay for daily expenses and paying them off at the end of the month is a great way to maintain an active account.
If your company is going to issue cards to multiple people, think about if you are going to issue them from a single account or multiple accounts. A single account lets you ensure that an account is not overlooked when making payments to the bank. There are also a variety of tools that exist for tracking what each purchase is used for. Multiple accounts can be useful as your company grows to the point where a single line of credit may not be feasible due to the amount spent over a month.

7. Check your Business’ Credit Report Frequently

Checking your credit is simple to do. A variety of tools exist online to follow your credit history. Checking on your own credit does not cause any detrimental effects to your score, so don’t worry about going to the three reporting agencies for your report. The biggest thing to do is not stress over minor point amounts. Follow your trends, ensure that you are paying on time, and challenge any errors that you think exist. Staying on top of your credit report is the best way to not be surprised when you prepare for your next meeting with your lender to take your business to the next level.

Speak with a Business Consultant to Establish a Business Line of Credit Today

With good credit, any business owner can boost their business’ reputation and ability to succeed by qualifying for low interest rate loans and funding. Review and understand your business credit score, stay current with the accounts that appear on your report, and correct any errors or fraudulent activity if necessary. Take the time to build and maintain business credit to keeping borrowing costs low and maintain easy access to funding so you can weather lean months and market uncertainties.

Take the next step - Let's talk!

Remember to speak with your financial, legal or tax professional for more information about the topics which interest you. Here are a few ways for you to share your ideas, learn more and interact with FinancialSafetyNet members, authors and expert advisors.
Have a question, but don't want to share it with everyone? Contact a financial advisor.
Want to contribute to the conversation publicly? Submit a comment.

Submit A Comment

About Chuck Piecukonis

You must be logged in to post a comment Login

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.