A Comprehensive Guide to Managing Business Credit

In this article:

• How to Build Business Credit
• Can You Use a Business Credit Card for Personal Expenses?
• The Impact of Personal and Business Credit on Credit Scores
• Best Practices for Managing Business Credit

Business credit is a financial tool that allows your company to access capital and resources based on its creditworthiness, similar to the way your personal credit score allows you to access capital in the form of credit cards, and home and auto loans.

Of course, one large difference between business and personal credit is that business credit is linked to your company’s Tax Identification Number (TIN), while personal credit is tied to your Social Security Number (SSN).

The health of your business credit is determined by various factors, including payment history, credit utilization, length of credit history, and types of credit used.

A strong business credit profile can open doors to better financing options, vendor relationships, and even partnerships as it helps lenders, investors and even vendors learn your credit history and repayment capabilities.

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However, keep in mind that just like personal credit, maintaining a positive Business credit score is an ongoing process that requires strategic planning and responsible financial management.

How to Build Business Credit

1. Request an EIN: To start building a good business credit score, begin by obtaining an Employer Identification Number (EIN) and incorporating your business. This creates a legal distinction between your personal finances and your business and establishes a distinct credit profile for your company.
2. Register for a DUNS number: DUNS stands for “Data Universal Numbering System”, and is managed by Dun & Bradstreet, the most well known business credit bureau. Your DUNS number will be required if you apply for government contracts, so it’s best to register early and get it out of the way while you are getting your credit in order.
3. Open a Business Bank Account: Once your business is official, open a business bank account and make sure to keep your personal and business transactions clearly separated. This is essential–lenders and credit bureaus look for this separation when assessing your creditworthiness. 
4. Get a Business Credit Card: Applying for a business credit card isn’t that different from opening a personal credit card. Simply search for cards that have terms that are favorable to your needs and apply!

Can You Use a Business Credit Card for Personal Expenses?

One question that often arises among business owners is whether it’s acceptable to use a business credit card for personal expenses. 

While it’s not illegal, it’s generally not advisable due to potential complications and risks. Using a business credit card for personal expenses can blur the lines between your personal and business finances. 

This can lead to accounting challenges, making it difficult to track and categorize expenses accurately. It may also raise eyebrows during tax audits or if you decide to sell your business.

It’s recommended to have separate credit cards for personal and business use to maintain clarity and transparency in your financial records.

The Impact of Personal and Business Credit on Credit Scores

While personal and business credit are separate entities, they can influence each other under certain circumstances. For small business owners, especially those with newer businesses, personal credit history may be considered when applying for business credit.

If your business is relatively young and lacks an extensive credit history, lenders may look at your personal credit score to assess your creditworthiness. This is common for sole proprietorships and small businesses where the owner’s personal finances are closely tied to the business.

Conversely, as your business establishes its own credit history, it becomes increasingly independent of your personal credit. This separation is essential for protecting your personal finances and ensuring that your business can stand on its own financial merits.

Best Practices for Managing Business Credit

Now that we’ve explored the nuances of business credit, let’s delve into some best practices for managing it effectively:

Monitor Your Credit Regularly

Regularly check your business credit report for inaccuracies or discrepancies. Address any issues promptly to maintain the accuracy of your credit profile. 

Pay On Time, Every Time

Timely payments are the backbone of a positive credit history. Missing payments or paying late can significantly impact your credit score, so set up reminders or automated payments to ensure punctuality.

Maintain Low Credit Utilization

Keep your credit card balances low in relation to your credit limit. High credit utilization can signal financial stress and negatively impact your credit score.

Diversify Your Credit Types

As mentioned earlier, a mix of credit types can positively influence your credit score. Aim to have both revolving credit (e.g., credit cards) and installment credit (e.g., loans) in your credit portfolio.

Build Strong Vendor Relationships

Cultivate positive relationships with vendors and suppliers. To ensure that vendors report your credit history to appropriate credit bureaus, politely request trade references to strengthen your business credit profile and demonstrate your reliability as a business partner.

Conclusion

Ultimately, your business credit alerts lenders and vendors to your financial responsibility and can be a powerful asset in securing favorable terms. By understanding business credit and implementing best practices, you can position your business for financial growth.

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