Before knowing about building business credit, it is essential to know, what is business credit. To answer the questions below.
What is Business Credit?
The capacity of a business to lend or borrow money is known as business credit. In other words, it can be said as repayment capacity of a business to borrow money with less risk involved. It works in the same way as personal credit, but with some special sophisticated KPI’s to calculate the credit for business. It is always better to separate your personal credit score from a business credit score.
Why Business Credit should be Separate from Business credit
Getting a personal loan for a business purpose, pulls your personal credit score at a place, using your tax number, respective to the country you live. If unfavorable conditions turn up on your business, you will end up hurting your personal credit score. In future, it could turn into situations where you could not be able to get loans for buying your new home, car and your personal expenditures.
Steps to build your Business Credit:
Separate Business and Business Owner:
The company needs to either set up as a limited liability company or it should be incorporated. This provides the security for the personal assets of the business owners. In case if you are operating as a small scale business or a sole proprietorship firm or a general partnership, both the business and the business owner cannot be viewed as different entities. Legally both the business owner and business are perceived as the same entity. Make sure that there is a clear distinction between business and the business owners.
Get a Unique Tax ID for Business:
Unique Tax ID is the first step in setting up a business. In the United States it is referred as EIN number and in India, it is called as PAN number. It helps the tax authority to keep a track of all your tax payments. It is even required to get the tax ID number from the suppliers of your company in all the invoices to keep track of all the incomes and payments.
Dedicated bank account for your business:
The subsequent step in creating your business credit will be to have a business checking account in the legal registered name of your company. To build your credit, pay all the invoices from your business bank account. Also, receive all the business related funds to your business bank account and not to your personal accounts. Keep track of your business expenses using your business credit card. Make sure you pay the business credit cards from the business bank account. Paying on time greatly helps in improving your credit score.
Create a business credit file:
Provide a business credit file in the business reporting agencies like Dun & Bradstreet, which is predominant in the United States. It could vary from country to country. This helps in evaluating the business credit score and makes it easier.
Obtain a business credit card:
Using a business credit card for business helps a lot in many ways. Paying on time on one side helps to improve the credit score, based on the credit limit. And also, a credit card can be used as short term loans and helps in liquid cash flow in the company. It is also essential to pick a credit card that reports to credit agencies.
Vendors and Suppliers:
Vendors and suppliers can also be used to increase your credit rating. Try to work with authorized vendors and agents, and you can ask them to report you to credit agencies on your proper payment cycles.
Why you should have a good business credit
- Easy approval of loans with less interest rates.
- Gives good positioning in order to find vendors, and it becomes easy for the vendor to provide favorable payment terms.
- Easy down payments based on your credit score.
- Trustworthiness of the company increases with the credit score. Goodwill.