What is Business Credit?
Business credit is the ability of a business to borrow money. It can be in the form of a credit card or line of credit.
Why Establish Business Credit?
Early in the life of a business, founders generally have to guarantee any loans or lines of credit for a business. Having business credit will allow the business to secure funding without resorting to the credit history of the owners.
What is a Credit Profile or Credit Rating or Credit Score?
Businesses and individuals can build a credit profile with a credit reporting agency.
Several credit rating agencies provide business services: Dunn & Bradstreet (for business entities) Experian, Equifax and TransUnion (for individuals).
The credit profile rating (Credit Score) represents a risk factor for loaning money to the business or individual. A high credit score means that the individual is dependable and it is a lower likelihood that they will fail to repay in borrowed funds. A low credit score signals the opposite.
Things to do to build business credit.
Form a Business Entity
To obtain a credit profile, a business must have a separate identity from the owners of the business. See our lecture series on choosing and forming a business entity.
Obtain a State and Federal EIN
Obtaining an EIN will provide a record of income and tax payments. See our lecture on obtaining an EIN.
Establish a Business Bank Account
Opening a bank account will provide a record for payment transactions. See our lecture on obtaining a bank account.
Obtain a Line of Credit or Business Credit Card
Obtaining lines of credit or business credit cards demonstrates responsibility. It provides proof of use of funds and payment of debts. Be careful not to open credit accounts too rapidly. This can actually hurt a credit score. Start by developing two or three credit sources. Use these sources regularly and make prompt payment on any debt. Note: The most advantageous type of loan is an unsecured loan. This type of loan may be difficult to obtain early in the life of a business.
Make Timely Payments
Like a personal credit history, businesses must make timely payments on all obligations. Failure to make payments or late payments are recorded and can harm a business’s credit rating.