Building business credit is a critical step in managing your business and its growth.
Why? As a business owner, you may need financing from time to time, either to buy more inventory, bridge receivables gaps or hire new employees, for example. Your business credit profile will determine how much debt your company can handle and at what rate.
To help ensure you have a strong credit profile and get the best offers for your business, we put together five common ways you may unintentionally be hurting your score, plus why and how to avoid them.
1: Relying on your personal credit for business expenses
It can be tempting to use a personal credit card to finance your business, but doing so means you’re not actually building any business credit. And did you know this could also hurt your personal credit score? Business expenses can add up quickly, increasing your chances of maxing out your credit limit which in turn leads to higher monthly payments and interest charges if you carry a balance.
In addition to personal credit cards, business owners have been known to use their home equity to invest in their businesses. The dangers here are obvious: you risk losing your home if you are unable to meet the payment obligations.
Your personal credit score should really only reflect your ability to repay personal investments. And it’s important to maintain a strong personal credit history when seeking business financing because the major business credit bureaus (Dun & Bradstreet, Equifax and Experian) all factor your personal credit score into their risk assessment of your business. After all, it proves to them that you are capable of repaying your debts on time.
2: Not realizing you have a business credit profile
Many business owners – particularly those just starting out or who haven’t taken out a business loan – don’t realize they even have a business credit profile. If this sounds like you, don’t worry. Just visit Dun & Bradstreet, Equifax or Experian to look up your business’ credit report.
It’s important to monitor this report at least once a year to get a sense for your business’ credit risk, determine what steps you might need to take to mitigate that risk, and update any outdated or incorrect information — which leads us to our third common small business credit mistake…
3: Not keeping your business information up to date
So what goes into your business credit report? There are a combination of factors that assess the creditworthiness of your business, and it’s critical that this information is up to date. Otherwise, a lender might not give you their best offer for your business.
Here’s a list of what you’ll find on your credit report — and what you should monitor closely for errors:
- Existing business credit history (such as length of credit history, credit usage, payment records, and outstanding debts)
- Public records (including bankruptcies, liens and judgments, and UCC filings)
- Business information (like company size, time in business, and industry)
- Business financials (for instance cash flows and revenue)
- Your personal credit history
If you find errors or outdated information, make sure to contact the bureaus about making changes. Depending on the bureau and the information that needs updating, you may be able to make changes online.
4: Working with vendors that don’t report to the credit bureau
Do your suppliers report your payment history to the credit bureaus? You should find out — and if they don’t, ask if they’d be willing to do so. This type of arrangement – also known as trade credit – typically involves 30- or 60-day payment terms. And as long as you make your payments on time, your business credit will get stronger.
You should also double check that any existing business credit accounts you do have are building your business credit. In regards to business credit cards, for example, some issuers report payment history to consumer credit bureaus, not Dun & Bradstreet, Equifax or Experian. There are a lot of business credit cards for Amazon sellers, just be sure to double check their credit reporting processes.
5: Not registering your business as a legal entity
If your business is small or, like many, is run by you and you alone, you may not think it’s necessary to register it as a legal entity (like a limited liability corporation, or LLC, for example). But consider this: as a sole proprietor, any credit cards you apply for could end up being issued to you personally, not your business. And going back to mistake #1, this means you’re not building business credit.
The good news is that there are plenty of services available to help you incorporate your business, including LegalZoom and The Company Corporation. Your accountant may also be able to guide you through the process.
All in all, to build your business credit, you should keep your business financials separate from your personal financials, pay close attention to your business credit reports, and of course stay current on your payment obligations.