We’ve already spoken to you about personal credit and the way it’s used by creditors to measure how trustworthy you are, but what do you know about business credit? Whether you have your own business or dream of going out on your own one day, business credit is one of the most important things you need to know.
But navigating it isn’t easy. Like with personal credit, you’ll often find yourself in a Catch-22 scenario. Most banks are reluctant to loosen their purse strings until you’ve proven yourself to be a good borrower, but of course, you can’t do that if no one will lend to you in the first place. The good news is that there are some simple things you can implement to get things going, but first, we’re going back to basics…
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Business Credit Versus Personal Credit
In essence, business and personal credit are the same – it gives lenders an insight into how good you are at paying money back, based on your past actions. Personal credit is linked to everything you do in your personal capacity so every bill or account held in your name contributes to that. The big difference with business credit is that it’s linked to you company as a separate entity and has it’s own tax number. Once you have set up business credit, whether you personally keep up to date with your bills won’t affect that and vice versa.
Like personal credit, building credit for your business won’t just happen without you actively doing things and it’s far better to work on it when you don’t need rather than when you’re backed into a corner and are desperate for finance. Naturally, in the beginning it might be easier to use money you’ve set aside to launch your business but at some point you might need to access funds unexpectedly, so doing the ground work to make sure you’re entitled to it will make a difference.
One of the biggest mistakes people make when setting out on their own is using a personal line of credit like personal credit cards to fund the business. The downside of doing so is that you become financially responsible for the actions of your business. Using business credit helps separate your personal activities from that of your business and besides, you will only build credit for your company if your company is borrowing responsibly, not if you are doing so on your own.
Establishing a strong, established credit history is so important because it will help lower interest rates and will increase the amount of money you can assess as and if you never it. You have to be warned, though – don’t expect things to change overnight. The good news is that you should expect to see a difference after a year.
How To Get Started
Before you do anything, make sure that you actually have a business. As obvious as it may sound, if you haven’t actually registered your company officially, it won’t be deemed a business in the eyes of the law and a bank. Make sure to do research into the type of company you want to create, as your choice will have some pretty significant tax implications. For more information about how to do this, and the other steps you need to complete to set up your company, visit here.
Ways to establish good business credit
Even if you’re not ready or have no intention to go for credit in the near future, here are just a handful of things you could be doing, just in case:
Set up a business account: If you do one thing, make sure you set up a business account. It might sound of obvious but according to experts, many small businesses continue to operate using personal accounts, which, will obviously work against you when you want to go to a bank for a loan. All you business needs is at least one bank reference, and if you do want to go for a loan, it’s expected that your account is at least two years old. But more important than the age of your account is the state of it. Banks will be looking at whether your cash flow can handle taking on business debt. Of course, this is dependant on the average amount in your account at any given time and just how much money you’re asking for.
Get a tax number: Just like we all have national insurance numbers (in the UK) or tax ID’s (in America), every business must have a tax number too. You’ll need to have this number to hand when you set up your business bank account.
Apply for credit before you need it: Remember when we spoke about the way apply for personal credit and paying it back on time is better than not having credit at all? Well, the same applies as business. A new small business will often have to establish itself for at least two years before a bank feels comfortable lending a considerable sum.
Get an accountant: Using one to manage and validate your financial statements will show lenders that you’re running a healthy business. It just adds a certain credibility to your company – think of it as the final stamp of approval.