Once your business is up and running, expanding is the next logical step! A business can never have too many customers, but as the old saying goes, it takes money to make money. Finding the financing for more advertising or creating new products can be tricky and in many cases, an entrepreneur has already tapped into all the usual (and easy!) sources- family, friends, and personal credit cards. Fortunately for the wise entrepreneur, there’s still one major source left: business credit.
1) What is Business Credit? Business credit is very similar to personal credit. It allows a company to get financing under the business entity’s name and is based on an assessment of the business and its finances by established business credit bureaus.
2) If it’s Similar to Personal Credit, Why Should You Have It? Using your personal credit to take out numerous loans harms your personal credit, while taking out numerous loans with your business credit harms neither your personal nor your business credit because business credit reports take into account the financing required for a business. Also, running a credit inquiry detracts a little from any credit and even a few inquiries can harm your personal credit. When using business credit, reports are only run on your business credit, and it can withstand more inquiries before it starts to decrease. Lastly, business credit is better for business expenses because it allows you to keep your personal finances private and to keep your personal credit line free in case you need it.
3) How Do You “Get” It? The first big step in building your business credit is creating your business entity. LLCs or corporations are typically the best entity choices for this because they remove some of the liability from you personally. Next you will need to obtain a tax ID number/EIN (Employer Identification Number). Both of these steps are easily done through most online filing services. Third, register your company with a business credit bureau. The big four business credit bureaus are Dunn and Bradstreet, Experian Business, Business Credit USA, and Equifax Business. These business credit bureaus frequently have different requirements regarding what you need to register and maintain a positive credit approval so make sure you pay attention to the details as failing to comply with these rules can actually harm your credit. After all this is done, business credit is built and improved by working with businesses that will accept your business credit instead of your personal credit.
4) How Does It Work? The business credit bureaus gather information about the trade credit transactions your business engages in and then they use it to create a business credit report about your company. Trade credit is when a business issues another business credit so your credit report is a direct reflection of how promptly and responsibly you pay off loans or debts you have with other businesses. This information is sent in voluntarily by the businesses however, making it important for you to choose to work with other businesses that will report your prompt payments. The credit reports also take in to account the credit cards and bank loans you have, as well as similar financial information. While not the only factor considered, paying your bills on time and keeping your credit cards low are two of the best ways to ensure you have a good credit report.
5) What Can You Do with It? In many cases, business credit allows you to receive higher amounts of financing than you would ordinarily be able to. In addition, being listed with a business credit bureau gives your company a better reputation and encourages lenders to loan you money. Vendors are able to contact the business credit bureau you are listed with and confirm that you are a reliable business that values making payments on time, thus encouraging vendors to work with you. Establishing business credit also allows you to monitor your credit as your business grows, paving the way for a successful and prosperous future. Essentially, business credit makes you a more desirable candidate for financing, exactly what you want to be when you are trying to expand your business.
Business credit is a very useful resource in the entrepreneur’s tool belt but not many business owners make it work for them. Don’t let yourself be one of them! Start your business off in the best way possible, and keep in mind what you can do to grow your business. Make 2011 the most successful year yet for you and your business! Learn more about business maintenance for your corporation HERE!