Business credit is crucial for businesses that are seeking to increase their financial capacity. Creditworthiness plays an integral role in determining what kind of loans your business can receive. When a lender loans money, they are taking a risk. To reduce this risk they take many different factors into account to determine what exactly they can offer you. One of these factors is the business’s creditworthiness.
A poor or non-existent business credit history will lead to fewer opportunities for loans, increased interest rates, and decreased maximum funding amounts for your business. Without access to funds, businesses often won’t have the working capital and increased cash flow they need to survive. As such, it can’t be stressed enough how important it is for small businesses to establish a good credit rating. In fact, according to the Small Business Administration (SBA), the second most common reason for business failure is insufficient or delayed financing.
In this post, we’ll discuss how business credit is calculated, along with a number of methods that you can consider when looking to establish credit for your small business.
Why is Small Business Credit Important?
When considering the value and importance of a good credit rating to your business, you should think of credit as an asset. In the world of business, assets can be classified as tangible or intangible. Tangible business assets are physical assets that you purchase, such as a vehicle or office building. Intangible assets on the other hand are assets that aren’t quite as easy to see, or maybe even understand. These include copyrights, trademarks, and, the subject of this post, business credit.
Incorporating your Small Business
This may seem self-explanatory, but it is the first step in establishing business credit. Sole proprietorships and general partnerships that are not incorporated are effectively the same as the owner under the law. This means they are not technically a “business” and they cannot have a credit rating separate from the owner’s personal credit rating.
In order to have a business credit rating, you’ll have to start separating personal and business finances. As a general guideline, the more separated your business and personal finances are, the better off you’ll be, and that doesn’t just mean for credit scores. Having a distinct and separate business and personal finances will go a long way in keeping your business organized and, even more importantly, limiting your financial liability.
Repay Your Debts on Time and Be Financially Responsible
This is definitely very straightforward, but it is important nonetheless. Just like personal credit scores, business credit scores will suffer if you fail to pay your debts back on time and in line with the agreed upon terms and schedule.
The best way to ensure that you are meeting all your financial commitments is by being financially responsible. Don’t take on debts that you can’t afford to pay back or which you think you may have difficulty paying back. Also ensure that you fully understand any and all contracts you enter into with lenders so that you are not taken by surprise by unexpected fees and financial commitments. Overall, use your good judgement and common sense.