During your adulthood, you'll likely make a few credit mistakes. How credit is reported and exactly what influences it is complicated, which is why there are many tricks and tips people use when learning about credit.
As if understanding your personal credit wasn't challenging enough, people who start companies also have to learn about business credit. As people build their business credit, they are liable to make mistakes, but a lot of these mishaps can be avoided. The following five tips can help you protect your business credit so it's healthy from day one.
1. Understand the differences between personal and business credit.
Aspiring business owners often assume that their personal credit history has nothing to do with their business credit history, but this is often not the case. Generally speaking, if you try to get a loan for a new business that has no credit history, the lender will review your credit information to determine whether or not they'd like to extend business financing to you.
So, in the beginning, your personal credit and business credit will be linked. As time goes on, you can separate your personal and business credit, which is often recommended by financial experts.
2. Raise enough money.
Entrepreneurs often seek external funding and investments but fail to realize how difficult they can be to secure. New business owners are already strapped for time, which makes reaching out to other entities for support even harder to do consistently and successfully. Because of this, many turn to personal funding before they exhaust their other resources, but this shouldn't be the case.
If you invest in your company with personal credit, you’ll add one more liability to your credit history – one that could have a significant negative impact on your score if you default on the payments. Fortunately, if you focus on raising enough money upfront – or you have a healthy amount of savings you can allocate to your startup – you can avoid putting your credit at risk.
3. Avoid costly mistakes.
Entrepreneurs are often familiar with the standard expenses they'll face, like renting office spaces, but less familiar with potential expenses they might incur. For example, the onboarding process can be extremely expensive, especially if a hire does not work out for your company.
Losing a single employee can cost you thousands of dollars, and if you don't have the money saved to cover this cost, you'll be tempted to use your credit to cover the expense. Ultimately, this might cause a greater credit expense than you've budgeted for, which will make you more likely to default on future payments.
To avoid this, young businesses should familiarize themselves with potential business expenses so they can either budget for them or avoid them altogether.
4. Stay up to date.
Once your personal and/or business credit are up and running, you can avoid bad credit by checking your history at least every six months. This might sound like a lot, but it's the perfect interval of time to check for errors that could negatively impact your score.
Two other benefits of checking your score this often is that it's free and doesn't hurt your credit. When you request your credit score, you will simply have a soft inquiry added to your credit history, which does not affect your credit in any way.
5. Hope for the best; plan for the worst.
In general, credit card and loan payments need to be paid off promptly, which is where a lot of young businesses get into trouble. After all, without income, there's no funding to pay off a balance.
To steer clear of bad credit during your company's infancy, you'll need to have money saved or an additional source of income that you can use to cover your credit payments. It also doesn't hurt to familiarize yourself with the debts that are reported to any one of America's key three credit bureaus. This way, if you do get into a tough spot, you can prioritize what needs to be paid first.
It's tricky, but it's not rocket science.
Just as you learned to have a healthy personal credit score, you can learn how to have a great business score. You might experience a few setbacks and learning curves along the way, but you can avoid the majority of these issues if you follow the five tips above.