When it comes to starting a new business, or even learning to manage an existing one, there are a number of important business concepts that an owner needs to understand. One of those concepts is business credit. It takes some extra effort to establish business credit, but doing so is a critical part of building a secure foundation for your business.
Listen to Peter and Jonathan discuss why business credit matters with Levi King, founder and CEO of Creditera on the fifth episode of The Bcast, Bplan’s official podcast (at 12:56):
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What is business credit?
To assess your ability to borrow money as an individual, lenders and banks look at your personal credit report. Over the years, you have built a credit history that is filled with information about credit cards, loans, and other financial interactions. This information is used to establish your personal credit score, which represents how responsible you have been as a borrower and how much banks and lenders can trust you with credit accounts and loans. In addition to your personal credit score, it is possible to establish a business credit score.
Business credit works in a similar way to personal credit. Just as your personal credit score is a compilation and analysis of your individual lending habits, your business credit score is a compilation of financial information related to your business. One of the main differences is that many credit bureaus will not actively seek out transactions to establish a business’ credit history. Instead, these transactions must be handed over voluntarily. Any individual starting a business can establish a credit history for that business by filing their transactions with the credit bureaus.
What are the benefits of establishing business credit?
Just as establishing good credit is necessary to receive personal loans and qualify for better credit offers, establishing business credit is a necessary part of ensuring a strong business. Businesses often deal in larger-quantity purchases and may have a variety of overhead costs. To cover these expenses before a profit starts coming in, most businesses need a source of credit. This is where establishing business credit becomes important.
How does an owner establish business credit?
To establish business credit, you will need to proactively report credit accounts and history to Experian, Dun & Bradstreet, and Equifax Business. This will enable these agencies to provide an accurate credit score range, which will help you establish your business more securely. Many investors and potential suppliers will check credit reports before deciding whether to do business with you. A lack of credit, or poor credit, can result in the loss of business opportunities.
Keeping track of your business credit reports is just as important as establishing credit in the first place. Always be aware of what is on the report, because this is what others see when they investigate your business. By checking your business credit score on a regular basis, you are not only protecting yourself against fraud, but you are also making sure the report accurately depicts your business and its current level of financial stability. Having an incorrect business credit report can damage your reputation and prevent you from conducting business in the ways you would like to.
Knowing your business inside and out
As a business owner, one of the best ways to make sure that your business is operating at the optimal level is to be fully aware of what is going on with every aspect of it. If you do not know your business inside and out, it will be difficult for you to make the most appropriate and productive decisions. Keeping up with your business credit by regularly checking credit reports is one of the most effective steps you can take toward understanding the current financial state of your business.