Building Business Credit for the Future of Your Business

Building Business Credit for the Future of Your Business

  • June 26, 2023
  • By Aidan Dwyer

When running a business, it’s crucial to grasp the distinctions between business credit and personal credit. While personal credit pertains to the debt you’ve personally accumulated, business credit relates to your business’s financial standing as a separate entity. This article explores the variances between the two, emphasizes the importance of building a robust business credit score, and highlights the protective role it plays for your personal finances.

Business Credit vs Personal Credit

Personal credit is the measure of creditworthiness resulting from your individual debts. It is reflected in your personal credit score, typically known as the FICO score. This comprehensive score takes into account several factors, such as the duration of your credit history and your payment track record.

Business credit represents the credit your business has established in its own capacity. Unlike personal credit, there isn’t a centralized score for business credit. Different credit bureaus and scoring models employ their own evaluation methods. Typically, business credit assessment revolves around a narrower set of variables, simplifying the process of improving business credit scores.

While business credit offers advantages, addressing discrepancies and legal protection can be more complex compared to personal credit. Consequently, many small business owners rely on their personal credit to finance their businesses. However, this approach poses personal liability risks should the business encounter financial hardships, as the owner becomes personally responsible for business debts. To mitigate risks associated with personal liability, building a strong business credit score is essential. This separation between personal and business credit shields your personal assets from the credit issues your business may face. By developing solid business credit, you can access financing options and manage financial obligations while safeguarding your personal finances.

Why Does Your Business Need Credit?

You may ask yourself, why does my business need credit? The personal and business finances of a businessman remain in a single state. Thus, building healthy business credit can help separate the two. Business credit is vitally important to the growth and financial health of your business. If you are able to build and establish good credit, it can lead to lower premiums on insurance. Consequently, this could lead to lesser interest rates on capital financing.

How to Build Business Credit

Building business credit is a process that takes time, it’s not going to happen overnight. Luckily there are a few easy methods to help get the ball rolling.

Legitimize Your Company

First, establish your business as a legitimate entity. This means you should take steps to obtain legal documents. It may include a Federal Tax Identification Number, Business Social Security Number, and Business phone number. You must provide a phone number as a legal entity to officially incorporate your business. Credit cannot be established without a fully-fledged company. 

Establish a Business Bank Account

Secondly, open a business bank account in the official business name. This should be the first thing you do before startup. You should use this bank account to pay any and all bills that your business incurs. Paying your bills on time or early shows that your business is reliable and can pay off debts.

Maintain Relationships with Vendors

Thirdly, building and maintaining relationships with vendors and suppliers is one of the best ways to improve credit. Maintaining relationships is more important if those vendors and suppliers report to the credit bureaus. The key to maintaining these relationships is to pay off debts in a timely manner.

In short, having a good credit score opens up a world of financing opportunities for your business. REIL can suggest ways to increase the credit score and provide referrals for endless opportunities. To see what financing options might suit your business best, click here

Comments are closed.