Dear business joke,
I am so excited I just started my business! But I’m still trying to figure out a lot of things. For example, how is business credit different from my personal credit? And how can I even start building it? – Jessica
Well, I’m happy for you! You have a lot of tasks ahead of you, but try not to get overwhelmed. Take it step by step and you will be fine. In fact, you probably know a lot more about business credit than you think if you’ve ever had and used your own credit cards and loans. The overall concept is similar.
here’s how build business credit into small, easy pieces.
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What is business credit?
In its most basic sense, business credit is the ability of your business to borrow money. Business credit products include credit cards, lines of credit and installment loans.
A lender will determine qualifying, loan or line of credit amounts, interest rates and terms by reviewing your business credit reports, which are prepared by Dun & Bradstreet, Company Experiential and Equifax Company.
These reports contain a wealth of information that a financial institution can use to understand the risks associated with providing corporate credit products. How the business has handled past credit and supplier obligations (people or businesses that provide goods or services to your business), current debt, number of years in business, annual income and legal structure are all listed.
Unlike consumer credit reports, the files do not start automatically, it will take a lot of work. To open a business credit file for all three business credit bureaus:
Then, when you start purchasing credit products on behalf of businesses and building relationships with vendors, those businesses will begin providing business credit information to filers.
Business credit vs personal credit
Personal credit is anything associated with you and your name, such as credit cards, student loans, car financing, and mortgages.
Although personal credit and trade credit are two separate entities, they sometimes include each other. This happens when you are a sole proprietor (you have a sole proprietorship) and there is no legal distinction between you and the business, so you are not building a business credit file. Your personal credit is your trade credit.
What you need to do, however:
- Decide on a business name. Maybe you offer personal fitness workouts, you might want to call your business something like “Shape Up with Jessica”. Whatever the name, it’s how you define the business.
- Open a bank account specifically for the business. A dedicated chequing and savings account for your business will not only keep you organized, it will also be useful for tax and financial projection purposes.
- Apply for a business credit card. In general, sole proprietorships can get approved for a business credit card because the qualification depends on your personal credit history. However, the card will show up on your consumer credit reports, so treat it responsibly. If you don’t and it becomes past due or in default, your credit will be damaged and the creditor can take legal action against you.
See linked: How to apply for a business credit card
How to create a business loan
Assuming your business is not a sole proprietorship, you can begin to build your credit history. Creating a positive business credit score isn’t complicated, but it does take action and dedication:
- Get commercial credit in your business ”legal name. The easiest way to establish business credit is to use a credit card. There is a lot of cards for the small business owner. Most offer expense tracking features and valuable rewards programs tailored to the needs of small business owners. You can even get credit card that offers 0 percent APR for a year or more, which will help you fund your start-up costs or ongoing operations with no added interest in that introductory period.
- Add a loan or line of credit. Just like with personal credit reports, it helps to have a variety of credit products listed on your business credit report. Loans are great if you need to borrow a substantial amount of money all at once and then repay it in equal installments. Interest is built into payments. Lines of credit are suitable for fluctuating or urgent expenses, since you can draw on the line as needed and only pay interest on the amount you borrow.
- Pay for credit products on time. All lenders will want to see that you paid each of your credit accounts on your file on time. The more timely the payments, the better your credit.
- Keep revolving debt low. While you may want to use your credit cards and lines of credit for all of your business expenses, always keep the limit in mind. If you consistently hold balances near (or at) the maximum, it will negatively affect your business credit.
- Manage suppliers responsibly. If you have contracts with vendors who provide data to business credit reports, do them a favor. Pay those bills on time.
- Monitor your reports. Regularly check the accuracy of each business credit report. Check (and correct) outdated or inaccurate information, especially before applying for more loans and credit cards.
With this plan, you can build the trade credit you need to qualify for the best credit products available. There will be no reason to overpay because of too high interest rates or to get stuck because you can’t borrow enough to meet your goals.
Remember: While building good business credit takes work, the effort pays!