Good credit can help business owners access more financing options, build credibility, and secure better interest rates and terms. While good personal credit enables business owners to get funding from banks and other lenders, business credit offers other benefits like separation of finances and improved credibility.
Personal credit is beneficial to most people, but for small business owners, learning how to build business credit can pay off in the long run. Here are some reasons to prioritize business credit.
Separate personal and business finances
Many small business owners and solopreneurs use their personal credit card for business expenses. Over time, this may make it tricky to effectively track business expenses. Getting a business line of credit or credit card can streamline budgeting and expense management.
Additionally, building business credit helps owners secure their personal credit and assets in case the business fails. It also protects your business credit when you’re facing personal finance problems like missed payments or fraud.
Establish greater credibility
Good business credit helps business owners create a professional image and build credibility with vendors, lenders, and potential clients. It helps owners appear more reliable and trustworthy and may help open the door to better opportunities.
Remember that your business credit report is not private and can be viewed by anyone; a strong credit history can make the business more attractive to potential investors, clients, and collaborators.
Improve your access to financing
When you establish and work on your business credit, you can access financial products designed for businesses. Business lines of credit or business credit cards are created with business owners in mind and may offer special features that make financial operations easier.
As your business credit score rises, you’ll enjoy increased access to a wider range of business financing, usually with more favorable interest rates and borrowing terms. Strong business credit can make it easier to secure funding for expansion, whether opening new locations, investing in new equipment, or launching marketing campaigns.
Increase your credit capacity
Your personal creditworthiness is calculated based on factors like your ability to make timely debt payments, your debt-to-income ratio, new credit applications, credit utilization, etc.
However, your small business credit capacity is derived from company revenues, company assets, payment history, industry classification, and more. Establishing a separate credit profile for your business may sometimes help you get higher credit limits when you borrow based on the size and scale of your business.
Create separate credit profiles for each business
While your personal credit is associated with your social security number, a business credit identity is connected to an Employer Identification Number.
Small business owners juggling two or three different businesses can benefit from establishing separate credit profiles for each venture. This helps separate finances for each business and prevents any credit damage from one business from affecting the others.
Establishing business credit requires small business owners to register their business, apply for a Dun & Bradstreet DUNS Number, apply for a business bank account as well as a business credit card or line of credit. While these steps can feel tedious, prioritizing business credit can offer benefits like improved credibility and reduces personal financial risk.
