Published By Janet Gershen-Siegel at August 11, 2017
Whether you have a new small business, or you are now involved because you bought one or have suddenly become an owner or a manager, here are 7 reasons why you should establish your business credit.
Even if you are a sole proprietor (let’s say you sell something handcrafted by no one but you), it will still pay off, big time, for you to erect a financial barrier between your personal credit and your business credit. Why? Because keeping a barrier means that your personal credit will not be affected by your business credit. You don’t stand to lose a car, for example, in the event that your small business goes into receivership.
Even if you pay all of your small business’s bills on time, every single time, you aren’t doing yourself any favors by using your personal credit cards (or other accounts such as a checking or savings account) to pay off business debt. Why? Because both forms of credit scores are affected by what’s called the Credit Utilization Rate. This is just a simple calculation of the credit you’re using, divided by your total available credit. You want to keep this ratio at about 30% or less.
Therefore, if you are using your personal cards to pay for your business expenses, you are raising your credit utilization rate. If you bring it above the 30% mark, then your personal credit score will be adversely affected even if you are diligent about paying off your business debts.
For the big credit reporting bureaus (Experian, Equifax, and Dun and Bradstreet; you know, all the places you know of where to check a business credit score), credit history is one of the components they use when calculating your business credit score. The longer (and better) your credit history, the better your small business’s credit score is going to be. When you consider what credit score is needed for a business loan, then you need every bit of your credit score you can get. If you start early, it can only help you.
You may not want to think about it, but there are going to be times when the work dries up. If you are in a seasonal business, then this is a part of the DNA of your company. But every business can go through leaner times. If you have to make payroll or equipment payments, or just cover the rent, you are going to need business credit in order to get by. And by establishing your business credit before you actually need it, you are far more likely to get better terms – or even credit at all.
What does this mean? If you have been responsible and set up your business with an EIN (Employer Identification Number), then at some point in the process you had to declare to the Internal Revenue Service that your small business is, indeed, an actual business and not just a hobby or the like. As a result, the IRS is already treating you and your small business separately when it comes to tax liability. Therefore, if you’re still floating interest-free loans to your business with your personal credit cards, then now is the time to cut that out.
What is trade credit? It’s where you work directly with a local supplier in order to establish a relationship whereby you can have a small loan (that is, credit) floated to you for the kinds of things you need all the time. A freelance writer needs flash drives and printer ink and possibly pens and paper. A plumber needs lengths of pipe. A carpenter needs nails. And pretty much everyone needs coffee. This is where to establish business credit!
When you establish a trade credit relationship, you also open the door for other sorts of relationships. By supporting a local business, you support your community. In addition, you never know who will introduce you to your next client.
Sometimes, a business opportunity is just too good to pass up, and you need to act quickly. This can be anything from getting real estate at auction to buying out the equipment owned by a company going through reorganization, to bidding on raw materials when they are at their best price for the year.
But you may not have that kind of cash on hand. Establishing business credit means that bank loans will be granted more quickly and with better terms. You will be able to take advantage of these opportunities, and seize them when they are still meaningful. Without business credit, even if you get a loan, it will inevitably take longer – and someone else might snap up those inexpensive raw materials or outbid you on that prime real estate.
Establish business credit as soon as you can and reap the rewards long afterwards.