When you first started your small business, you probably had trouble securing loans or credit cards in the business's name. That's because the business had no credit history. In this situation, it's usually up to the business owner (or partners) to secure loans using their own credit history. Of course, this isn't how you want to operate your business long-term. Small businesses need credit for several reasons:
1. To protect personal credit and assets.
Though you own your small business and your financial success is tied to that of the company, you should keep your personal finances separate from your business finances as much as possible. Your business is a separate entity from you as a person, and you should operate it this way. You should build the credit of your business as quickly as possible so you don't need to rely on your own creditworthiness.
This is especially important when your business is a partnership, corporation, or LLC. You want to protect your personal assets as much as possible, and you can't do that if you're using them as collateral for your business.
2. To secure larger loans.
Most personal loans have caps that are much smaller than those of business loans. If you find yourself needing a large loan in the future (to expand your business, for example), you may find yourself in a tight spot if you lack business credit.
3. For reasons that have nothing to do with loans.
Obviously, lenders consider business credit more reliable than personal credit, but what about everyone else? Did you know that anyone can see your company's credit score, and it's not unusual for vendors, other businesses and even customers to check your credit before they choose to conduct business with your company. It makes sense if you think about it: Would you want to do business with a company that wasn't financially stable and trustworthy?
So, how do you build business credit?
Building credit as a business isn't much different than building credit as an individual. In fact, sometimes it's a bit easier - or at least faster. To start, you should:
1. Check your credit information.
You should stay on top of your credit profiles at the major reporting agencies, including Dun & Bradstreet, Standard & Poor's, Experian and Equifax. Make sure the information is current and correct, and keep an eye on it in the future.
2. Establish relationships with your suppliers.
Even if you can pay cash for your purchases, it's a great idea to set up lines of credits (called trade lines) with your suppliers. Ask if they report to the credit agencies, and stay on top of your payments. Even if the suppliers don't report, you can use them as references for future applications.
3. Make payments early.
Business credit works much like personal credit: If you make your payments on time, you're considered financially trustworthy. To make sure you don't fall behind, it's best to make your payments early at first. Once you have a good accounts payable system in place, you can simply ensure you're making payments on time.
4. Use small business loans wisely.
Small business loans are often a great financial decision. When used correctly, they free up capital, letting you run and expand your business freely. If you want to build your credit, make sure the lenders you use report to the top credit agencies and always make your payments on time.
Every day, millions of small businesses are building their credit so they're seen as financially strong, trustworthy companies who are worthy of doing business. With a little effort, you can be one of those small businesses, too.