Business Credit

Why You Need Business Credit

Establishing business credit is a crucial step for any new small business and helps you to:

Provide a credit history separate from your personal credit history.
Prove separation between the owners and the business.
Experience the benefits of having good business credit

Why Separate Credit Histories

Unless your small business is a sole proprietorship or a general partnership, you need to show that the business is separate from the owners. One of the major benefits corporations and limited liability companies (LLCs) provide their owners is protection of personal assets. It’s important to keep this protection in place showing clear separation between the owners and the business.

Benefits of Having Good Business Credit

Having good business credit gives you a number of benefits like:

Favorable payment terms with new vendors and suppliers.
Reducing or eliminating the need to prepay for products or services.
The ability to obtain better interest rates and credit terms from lenders and banks.

Once you have established and built good business credit, be sure to monitor and protect it, just as you do with your personal credit.

How Business Credit Works

Essentially, you establish business credit based on your business financial history in the same way that you build personal credit based on your personal financial history. Your business financial history depends upon how you handle any credit that has been extended to your business, including credit cards, loans, lines of credit, supplier trade lines and more. And just as your personal credit shows your reliability as a borrower, your business credit shows whether your business is a reliable borrower or not.

Until you establish business credit, most lenders will require a personal guarantee when requesting a business loan. You’ll need to put assets such as your home on the line, with those assets serving as collateral for the loan.

Business Credit Reporting

There are three main business credit reporting agencies Experian, Equifax and Dun & Bradstreet. Each agency collects information from vendors and creditors you do business with, legal filings and public records. Using a credit reporting algorithm, they establish your business credit in the form of your business credit score. But unlike a personal credit score, your business credit score will vary by agency because each one has their own method for calculating your score.

Your business credit score directly impacts your ability to qualify for a business loan and the interest rate you’ll receive. Investors are attracted to high credit scores and are more likely to partner with companies showing good credit.

Finally, your business credit is an asset of the business. If you sell your business, the business’s credit score goes with it. Having good business credit increases the value of your business. Even if you don’t need it yet, starting to build good business credit now will open more doors in the future.