If you're financing your business with personal credit, make sure to build business credit
There’s no denying the importance of business credit—after all, it can be as important as personal credit. Because of this, it’s vital that companies constantly monitor and work toward improving their scores. This way, they can ensure they receive fair treatment from credit bureaus and lending institutions.
If you are currently financing your business with personal credit, the first step is to build business credit. Many entrepreneurs get their companies off the ground with their own financing; but as time goes on, it’s important to separate your business and personal financing. From here, it’s all about improving your business’ credit.
Establishing and maintaining business credit can seem overwhelming, but this doesn’t have to be the case. Fortunately, there are several steps you can take to begin building and strengthening your business’ credit today.
1. Establish credit
Before you can begin to improve your company’s credit history, you must decide what structure makes the most sense for your company. No matter what structure you decide on, ensure you understand its pros and cons when it comes to protecting yourself and keeping your personal and business credit separate.
After you’ve incorporated, you will likely need to obtain a federal Employer Identification Number, a bank account for your business and a business phone. After these steps are complete, you can begin to build business credit.
2. Obtain a company credit card
Applying for a business credit card is rather easy, although it is not something that should be rushed or done without thought. Although obtaining a line of credit for your company might be simpler than you think, choosing the right lender to work with and the right card is inordinately important.
In general, you’ll want to try and find a credit card that has a high limit and a low annual rate. If you’re worried about receiving a card with a large amount of credit availability, you will learn why this is an important factor in the next paragraph. Additionally, you might want to seek out a card that offers rewards. For example, some cards offer business owners “points” that can be used for rebates and prizes.
3. Watch your ratio
Credit experts have several suggestions when it comes to credit utilization ratios, but they generally recommend companies keep their credit card balance below 30 percent of its total available credit. For example, if you have a $1,000 credit limit, your balance shouldn’t exceed $300 at any given time.
Although the 30 percent is a guideline and not a rule, figuring out a solid credit utilization ratio for your company and sticking to it is a must. So, you’ll likely want to secure a line of credit with a higher limit. This way, you can stay at or below 30 percent of your maximum—protecting and building your credit.
4. Payment timing matters
If you’ve ever taken out a personal loan, you likely understand the value of making your payments on time. However, did you know that not all lenders report your payments to credit bureaus? If you work with a financing entity that does not report your payments, you will miss an opportunity to boost your business credit—if you’re making all of your payments on time.
If you’ve struggled to make other payments on time in the past, there are several steps you can follow to get off on the right foot with your business’ credit.
5. Stay current
Today, personal credit scores are rather streamlined—there are several credit bureaus that keep this information up-to-date, and they all compile their scores in a similar fashion. On the other hand, business credit bureaus can calculate scores differently, leading to more variation.
When you go to apply for business financing, lenders will pull your credit, but it’s hard to know what bureau they will pull from. In other words, depending on where they get their information from, they might receive a different score. To increase your chances at receiving the best funding—which can save you thousands of dollars—ensure that your information is up-to-date with every bureau. This way, the potential lender will see your best score.
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Establishing a credit history for your business is the first step, but it doesn’t stop there. Once you obtain credit for your company, you must constantly work to improve your business' credit score so you can receive appropriate funding and fair treatment over the course of your company's life.
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