Published By Janet Gershen-Siegel at October 19th, 2017
You have probably heard of business credit, but it might not have occurred to you why it’s important and how it can truly benefit you and your company. After all, you’ve already got personal credit, right? So why should business credit matter?
Business credit is credit in a business name that is linked to the business’s EIN (Employee Identification/Tax Identification) number. This is credit for your business, and it is not linked to you personally, or your personal Social Security Number. Using your business credit you can get vendor credit cards, high-limit accounts with most major retailers, fleet credit, as well as cash credit for your business including Visa and MasterCard.
Business credit is a measure of the business’s own ability to pay its bills on time – and not its owner’s ability to pay. This is true even if the owner is the sole employee of the business.
There are several good reasons for having business credit which is separate from your personal credit.
You can get approved for business credit accounts regardless of personal credit quality. When you build your business credit the right way, you won’t even supply your SSN on the application.
With no SSN supplied, there isn’t even a personal credit pull. For this reason, you can obtain high-limit business credit accounts regardless of your personal credit, no matter how bad it may be.
Every time your personal credit file is pulled, it temporarily lowers your personal credit scores. If you have a few pulls (inquiries) in a short amount of time, say, two within six months, you may find later creditors don’t want to extend credit to you. This is because they do not know how much credit you’ve already had extended to you by other creditors. 10% of your total consumer credit score is based upon inquiries.
It’s a creditor’s mission to make sure that they only extend credit to people and businesses that can pay them back. A lot of pulls means a lot of applications for new credit, and that sets off alarm bells in a creditor’s mind – can you responsibly manage so much new credit?
With business credit, any pulls on your business credit file don’t affect your personal credit file (the reverse is also true), because you’re using the business’s EIN instead of your SSN. Hence your personal credit scores remain intact as you build business credit.
Some business lenders will not bother lending to your company if they find two or more inquiries on your personal credit within the previous six months. Unsecured lending is essentially lending not backed by an amount of money. Instead, it’s backed with collateral and it can be a great way to get a lot of business credit in a short amount of time. But you’re hobbling that effort if you have too many recent personal credit inquiries.
A good 30% of your personal credit scores are based upon your credit utilization rate, which is just a simple ratio of the credit you use divided by your total available credit. This ration is calculated for your overall credit and also per card. Hence if you have $1,000 is total available credit on a Visa card, and you charge $500, then your credit utilization rate for that Visa card is 50%. But creditors prefer your credit utilization rate to be 30% or less. What do you do, particularly when you need a $1,000 piece of equipment? With business credit, your purchases via business credit don’t affect your personal credit utilization rate at all, thereby not harming your personal credit score.
Lenders, vendors, and creditors are well aware that your business will probably need some expensive equipment, such as everything from a printing press to a fleet of trucks or a modern refrigeration system. Your business will also need to be somewhere – even if you work out of your home, you’ll need a business address to help establish business legitimacy and to accept service of process. That doesn’t come for free.
As a result, when business credit is extended, it’s often for far more than what you would normally get when going for personal credit.
Startup companies in particular tend to be on conventional banks’‘do not loan’ lists. Why? It’s because they are seen as bad credit risks, and rightfully so. However, with business credit, you can bypass the banks entirely and instead lean on business credit cards and extended credit which doesn’t come from a regular bank. Why apply for a bank loan when your business is only going to be turned down, anyway? 89% of such applications are turned down. The odds just are not that great.
Due to tax requirements, you cannot even apply for business loans through conventional sources until you have been in business for at least two or three years. However, that is not necessarily when you need the most funding. Let’s face it – you need the money yesterday. When you go to a bank and get a business loan, it is often through the SBA. And while they are a great and reliable source for funding, they cannot get your business off the ground like business credit can.
Got a personal Home Depot credit card? What if you also had a Home Depot credit card under the name of your business? Suddenly you’ve got way more buying power at this one vendor. And when it comes to major credit cards like MasterCard or Visa, having the two cards extends your purchasing power even further.
Vendor credit, also known as trade credit, is when you get extra time to pay for goods and services from vendors you use all the time and for products and services you regularly get. These are goods like coffee or shipping boxes. Trade credit also has the benefit of – when you work with true starter accounts such as Quill Office Supplies – building your business credit scores.
Unsecured credit cards tend to:
60 days after you get vendor (trade) credit which reports to the business CRAs, and after you have 5 payment experiences, you will start to qualify for store credit for your company. Store credit is usually $2,500 – $10,000 in revolving store accounts at many major stores like Amazon, Dell, Walmart, BP, Chevron, Best Buy, and many others. As you continue to apply you’ll continue to get even more credit at more stores with higher limits. This credit can be used to buy the things you need to fund your business.
Once you have 10 payment experiences, you will graduate to fleet credit and cash credit. Fleet credit is credit for repairing and maintaining your company vehicles. Cash credit is Visa, MasterCard, Discover, and American Express credit with limits of $5,000 –$10,000. It usually takes 4 – 6 months to reach this level with building business credit.
Business credit is the only way you can get money for a business if you do not have:
Business credit will help your business grow in ways you are only just starting to imagine. It is well worth it to cultivate, develop, and improve business credit.