If you’re a business owner, it’s important that you keep your business credit separate from your personal credit. Doing so will help you protect both. It may seem convenient to use your personal credit when running your business because there is only one account to keep track of. But this increases your risk of damaging your personal credit, which may affect your family. You also deny yourself opportunities that you could use down the road by establishing business credit.
It’s not hard to establish business credit, but it does take some time and patience. Keep in mind that business credit is worth investing in. The future of your company will benefit from keeping your business expenses separate from your personal credit. Good credit improves the value of your business. You’ll also be protected if anything goes wrong with your business. Here is how to establish business credit in six easy steps.
What is the Difference Between Business Credit and Personal Credit?
Although there are some similarities between business and personal credit, there are several fundamental differences that determine how you use them. Personal credit was designed to protect people as consumers. According to the CARD Act, your credit card company is required to give you at least a 45-day notice before making substantial changes to your interest rate or late fee payments. Similarly, your business card company does not set a cap on your interest rate.
Unlike personal credit, business credit cards are not created to benefit the cardholder regarding how payments are set up. For example, your personal credit can be created with the highest interest rates being applied to balances first while business credit cards implement the lowest interest rates to payments first. This causes you to pay more money in interest, which greatly benefits your the credit card company and not your business.
Your personal credit card offers protection because it allows you to challenge any charge that appears on your account. Because of fair credit reporting laws, you can request that any negative charges be removed. You won’t find this option available with your business credit card. In fact, you can make requests or challenges to anything that appears on your account, but your credit card company does not legally have to respond to you. This makes dealing with business credit card problems a pain. It also increases the importance of monitoring your business credit to prevent fraudulent or incorrect charges.
The good news is that many business credit companies extend much of the same protection to your business credit as they would with personal credit. It’s worth your time to know which companies offer the most protection to avoid problems in the future. Another key difference is that personal credit scores range from 300 to 850. Business credit is scored on a scale of 0 to 100. You’ll have a lower lending risk if you have a higher score in both your business and personal credit numbers. But if you own a business, you’ll want to aim for a score of 100.
Three primary companies score your business credit: Equifax, Dun & Bradstreet, and Experian. All three bureaus use different scoring systems. If you were to have all three companies give you a business credit score, the number might be different for each agency. Despite a slight difference, all three numbers should be in the same vicinity. You should plan on checking your business credit score often to make sure there are no changes or errors to your account. An error that shows a lower score can reduce the opportunity to get credit.
Here is What You Need To Know About Business Credit
An essential piece of information to know about your business credit score is that the higher the number, the better your credit. You’ll want to study your business credit report to get a full understanding of your business credit. All three of the primary credit business companies should provide you with a copy of this report. For a fee, Experian offers an online system that manages your credit report request. It also provides services to receive alerts about changes to your account and monitor your business credit.
There are three basic forms of information that are required to calculate your business credit score: legal filings, information about your credit obligation, and details about the background of your company gathered by collection agencies, public records, state filing centers, credit card companies, and any other relevant source.
Business credit companies use the following three factors to calculate your business credit score:
- Public records: you’ll need to know the frequency and amounts associated with any liens, judgments, or bankruptcies
- Credit: your credit includes payment habits, trends, balances, and utilization
- Demographic details: such as how many years you have been in business, the size of your business, and your Standard Industrial Classification (SIC) code
If you have a low business credit score, it might be because you have missed payments or current liens, collections, and judgments. Other reasons why you might have a low business credit score are due to your years in business, the number of outstanding balances, payments or credit utilization, and slow debt payment increases.
Information can stay on your business credit report for up to several years, depending on the data. The length of time in which data remains on your business credit report may vary between the three primary business credit companies.
Here is an example of how long data remains on your business credit report by Experian’s standards:
- Collections: six years and nine months
- Trade data: three years
- Bankruptcies: nine years and nine months
- Judgments: six years and nine months
- Tax liens: six years and nine months
- Bank, leasing or government data: three years
- Uniform commercial code filings: five years
Keep in mind that your business credit report needs to be entirely accurate. Even one mistake that might not seem like a big deal can negatively impact your score. There are several things you can do if you notice that there is incorrect information on your business credit report. First, find out of the mistake was listed on your reports from all three major business credit companies. Make sure this information is, in fact, a mistake before contacting your business credit bureau. You’ll want to circle the error on your report and include an explanation of what is wrong. If possible, provide supporting documents to dispute the mistake.
It might seem like a lot of work to establish business credit, but it’s worth it. Even if you already have a firm understanding of finances, you’ll want still to get business credit. If you don’t, you may risk improving your financial capacity. Strong business credit makes it easier for you to establish your company financially. For example, you can apply for a business loan relying on your personal credit. You’ll also improve your credit capacity. The SBA stated that businesses have up to 100 times greater credit capacity than individuals with personal credit.
The value of your business increases as your business credit score improves. Even if you’re sold on never selling your company, it’s always important to have a valuable business. Remember that your company’s credit score is transferable. Putting in the hard work now to establish your business credit could be a strong selling feature to any potential buyers down the road. Finally, you’ll protect your personal credit by opening a business credit account. Mixing the two is never advised.
How To Get Business Credit
Patience is key. Remember that you won’t establish business credit in a day. The process won’t seem so tedious if you have a plan of action. Once your business credit is established, you’ll be able to easily obtain credit cards, secure loans, and lease equipment. Here are six steps you can take to get business credit.
Don’t mix business with personal.
We’ve said it before, but it’s worth repeating. The first step to establishing business credit is to leave your personal credit out of it. When you first establish your company, your personal credit might be all you have. Make the switch to business credit early. Doing so will help you build your credit score quicker. Start by registering your business as a limited liability company or a corporation. When you obtain a legal business entity, you can slowly start building your credit. Once your company is in a good place financially, stop using your personal credit altogether.
Apply for an EIN.
An Employer Identification Number or an EIN is a nine-digit number the IRS will give you to identify your business. You will need this to register your company. While you need to provide your social security number to establish personal credit, your EIN is required for business credit. It’s how the IRS will identify your company.
Open a checking account for your business.
After you apply for an EIN, your next step is to open a business checking account. Never use your personal checking account for business-related matters. However, if you have established a personal checking account with a local bank, then you can use them for your business credit, too. Most banks that handle personal checking accounts can also help you establish a business checking account. You’ll also want to open a business credit card. At first, your credit card limit might be small, but you’ll need this to build your credit slowly.
Start paying for business expenses with your business account.
Make sure all your business-related expenses are made through your business account. Use it for everything from rent to utilities and your business phone line. Even small purchases made with your business credit account can improve your credit score over time. No matter what the purchase is, make sure you pay your bills on time each time they are due. You don’t want to become negligent on payments when trying to establish business credit.
You’ll also want to begin to use your business credit card to purchase things such as office furniture or setting up supplier accounts. If you’re using credit with vendors, make sure they report this activity to the three bureaus.
Take steps to build your credit.
With your business credit account established, you’ll want to build your credit by leasing equipment. This is especially beneficial if your company requires equipment, but you don’t qualify for a loan or have the cash to cover it. Leasing your company’s equipment allows you to grow your business and your credit.
Watch your credit-utilization ratio.
The last step to building good business credit is to watch your credit-utilization ratio. When opening a business credit account, ask yourself how much your balance is and how much credit you have available. For example, if you have a balance of $10,000, then you should have $20,000 available in credit. If this is the case, then your credit-utilization ratio is 50 percent. Keep this in mind when making big purchases. Make sure you don’t push for a higher credit-utilization ratio as this may impact your credit.
If you already have business credit established, you can improve your credit scores by following these tips:
- Never make a late payment, ever.
- Consider establishing a positive trade relationship with vendors and suppliers. Add data to your credit file when applicable.
- Keep your credit-utilization ratio as low as possible, so your business is not viewed as a risk.
- Request a credit limit increase after six months to a year.
Your business credit is just as important as your personal credit, but the two should be kept separate. Your business credit can be the deciding factor in how well your company does. Understanding the importance of having business credit makes your business more valuable and opens the door for many opportunities in the future. Your business credit account will require lots of attention. This can seem overwhelming, but having a strong business credit score will always be worth the effort. Six easy steps are all it takes to establish business credit.