Start building your business credit the right way.
You know the adage: A little bit of knowledge can be a dangerous thing. That’s certainly true when it comes to credit, where a misstep can affect your credit scores for months or years, making it more difficult and expensive to get funding when you need it. And when it comes to business credit, many small business owners have little experience or frame of reference, making it easier to fall for bad advice.
Here are some common business credit myths that can trip up small business owners:
Myth: Building Business Credit is Just like Personal Credit
The overall process of building business credit is similar to that of building personal credit: Establish accounts with companies that report payment information, then pay on time and keep debt low. But there are some differences between the two you should know. One major difference is that payment information for business credit may be much more detailed than that of personal credit. Unlike personal credit, where payment history falls into 30-day buckets, if you pay a business account even a few days late, it may be reported as a late payment.
Myth: My Business Needs to be Two Years Old & Turning a Profit
While it’s true that many banks prefer to lend to successful businesses with at least two years of experience and solid financials, there is nothing stopping you from establishing a commercial credit history as soon as you start your business. And why wait? Similar to personal credit, an older credit history will be considered lower risk than a newer one, so the sooner you start, the better.
One easy way to get the ball rolling is to get a business credit card to use for your business purchases. Most business credit cards report to one or more commercial credit agencies; however, the application is usually evaluated using the owner’s personal credit scores. And personal income can also be used to help qualify. That means that if you have decent personal credit and sufficient income from a variety of sources, you can probably get a business credit card—even if your business is not yet profitable.
Myth: I Pay My Bills on Time So I Have Good Credit
Paying your bills on time is a great habit, but it only helps your credit history if those accounts are reported to business credit bureaus. Some lenders and vendors report to one or more of these agencies, but others do not report.
Myth: I Don’t Need to Borrow So I Don’t Need Credit
Your business credit information may be used to evaluate your business for a variety of opportunities beyond loans, such as working with new partner, a major retailer, or landing a government contract. It may be reviewed when you apply for business insurance.
You never know when your business credit reports will be reviewed, or when business credit scores will be used to make a crucial decision about your business. Establishing that credit rating before you need it will give you one less thing to worry about when opportunity comes knocking.
Setting all myths aside if you have questions ask your accountant or a lending professional for direction, that’s what they are there for.