Inevitably at some point, even the most frugal of business owners will find themselves having to borrow money to fund their business’ operations or growth. When it comes to business finance, especially via “traditional” sources, such as bank lenders, creating and maintaining a strong business credit profile is a must.
For that reason it is vital that business owners separate business credit from their personal credit profiles.
Lenders typically examine business credit reports before providing loans. Business credit scores are affected by the amount of credit already held on credit card and bank loans, and the number of inquiries made about the credit profile. The length of time the business has maintained a credit profile, and the business’s history of loan repayment, also contribute to the credit score. On a range from 0 to 100, scores above 75 are considered superb.
When business owners apply for business credit cards, leases or loans, they want their high credit scores to reflect their credibility. If they apply using personal credit information, they risk reducing their credit scores. That’s because the more credit a person holds, the lower the credit score.
Typically, a personal consumer credit report has 11 credit obligations and one inquiry per year. Adding business credit to the personal credit report can easily double those numbers. Business inquiries and personal inquiries aren’t separated on the credit report, so the lower credit score can impact the business owner personally and professionally.
On a personal level, mixing personal and business credit can hit home. Business owners have been unpleasantly surprised to have been rejected for a home mortgage or personal car loan, because they owed too much money for business expenses.
In the event of business failure and loan non-repayment, mixing personal credit and business credit can bring painful consequences. If business loans were reported on the owner’s personal credit profile, the negative impact on the owner’s personal credit score can haunt him or her for a long time.
Establishing business credit is not complicated. Firstly, form a corporation or LLC, and contact the IRS to obtain an FIN (Federal Tax Identification Number). Next, register with the business credit bureaus, such as Experian Business and Equifax Business. When you seek credit card or bank loans, ascertain that they regularly report payments to the credit bureaus. Once your business has been granted credit, manage it well. Of course, paying off debt as required will improve credit scores. Keeping your credit profile active by borrowing and repaying credit regularly also promotes high credit scores and improved loan eligibility.