You probably already know that a good personal credit score is an important thing for a person to have. Whether taking out a loan or renting an apartment, more things are possible if you have good credit on your side. But if you are an entrepreneur, it is equally important to have good business credit, independent from your personal credit score.
Why do you need business credit?
If you started your own business, you most likely got it off the ground with your own money. Why, then, should you separate your business and personal finances?
First, it’s more secure. If your business fails, you don’t want that failure to damage your personal credits. And if your business is sued, you don’t want to risk losing your personal assets in court.
Second, having business expresses separate makes it easier for you to make the appropriate tax deductions.
Third, a business can access more credit than a person can: ten to a hundred times more. This is useful for two reasons. First, businesses often need that higher ceiling, because they must work with larger sums of money than the average person. Second, even if your business does not require such sums, more wiggle room is better. Experts recommend that companies try to keep their credit utilization ratio under 30% of the credit made available to them. If more credit is made available, this is naturally easier to do.
How do you improve business credit?
Business credit can be formed and improved in many the same ways as personal credit. This includes obtaining a company credit card, paying bills on time, and staying up-to-date on how your company is scoring.
Like personal credit cards, business credit cards are easy to find and apply for. However, it is important to compare the available choices, and make sure that you are picking the best option for your company. Look for low rates, as well as high spending limits. Again, a limit that seems unnecessarily high will play to your advantage, as staying within 30% of that limit will help your credit in the long run.
As with personal credit, it is unquestionably important to pay bills on time. In addition to avoiding fees, failure to pay in a timely manner will damage your credit. if you are worried about remembering to pay on time, you can set up your account to collect payment automatically.
Lastly, you need to understand how your credit is determined. Credit scores are compiled through credit bureaus. When you go for a loan, or rent a space, or do anything else that requires credit, lenders will receive your score from one of these companies. You don’t know which one—it depends on the lender—and with personal credit, it doesn’t really matter, because personal credit bureaus all do their calculations the same general way. However, unfortunately, business credit bureaus are not so uniform. As a result, different bureaus will come up with different scores. So that you are not caught off-guard, and so that you can update information as need be, keep an eye on your business credit scores according to multiple bureaus, not just one.
Separating your business and personal credit will both benefit your business and protect your personal finances from going under if your business fails. Establishing business credit is similar to establishing personal credit, but note the few differences there are—for instance, the higher ceilings and the less uniform scoring methods. Being aware of how business credit works will help you grow your business in a smart, financially sustainable way.