An overview of personal credit

A credit score is a number that showcases your creditworthiness to lenders. A high credit score indicates you’re likely to repay your lenders and are responsible with credit. Alternatively, a low credit score to lenders generally means you’re more likely to skip or miss payments. 

Credit scores range from 300 to 850. Your credit score is typically made up of five factors, including payment history, amounts owed, types of credit, new loans and length of credit history. 

What is credit in business?

When it comes to your business, you get the same type of score as outlined above, but it’s applied to your company rather than you. Once again, it’s a number that tells lenders if your business is financially responsible when borrowing money. 

Your business credit score is made up of information found in your business credit report. The data found in your business credit report can include the following:

• Business type

• Number of employees

• Historical data of the company

• Payment history

• Accounts owed

• Legal filings such as tax liens, judgments or bankruptcies

Most business scores range only from 0-100.

Why does business credit matter?

Business credit is an integral part of business operations that impacts almost every company. There are a few ways business credit can affect you as a business owner.

Ability to borrow money

Very few business owners start a new company and can fund every single cost with cash. Most business owners need to borrow some capital to help pay for all the exorbitant costs of starting up a business. Additionally, many new businesses take several months before they begin to break even or make a profit. That is where access to loans and credit is essential in keeping the business operating. 

If a company has no business credit or very poor credit, it might be denied money when it needs it most. This can result in any of the following:

• Having to foreclose on the business

• Being sued for not paying employees or vendors

• Having to resort to pulling from personal finances by taking risky measures, such as remortgaging a home or taking out retirement savings

The cost of borrowing

It’s important to understand that it’s expensive to have bad credit. Lenders see you as a riskier borrower if you have a low credit score. To offset that risk, they offer you a higher interest rate on your loan. And, depending on the size of your loan, an interest rate that is even half a percent higher can end up costing you hundreds or thousands more.

Future opportunities

A good business credit score also means you’re more likely to get quick approval on loans and credit when you want or need it. Let’s say you come across a new business opportunity and want to take advantage of it quickly. Knowing that you can get fast approval for funding will allow you to:

• Expand your operations (new product lines, locations, hires, etc.)

• Take advantage of partnerships

Affordable insurance policies

Another way that your business credit score can save you money is with your insurance. Insurance rates for new and growing businesses are often high. But you can get a lower rate if you have a strong business credit score. 

Diving personal and business

If you don’t have a business credit score yet, a lot of lenders or borrowers will review your applications based on your personal credit score. And while this can be helpful in the beginning to get yourself business credit, it’s not a strategy you want to implement long term. 

Having a business score is essential so your business activities don’t impact your personal credit score. 

How to establish business credit in 5 steps

Luckily, even if your credit score is low now, it’s something you can work on. So, wondering how to establish business credit for the first time? Follow these five steps.

1. Establish your business

Your business credit score is based on your business credit report. And your organization will only have a business credit report once you legally and formally establish your business. You’ll want to complete the following steps to get your business up and running and set up to start having a credit record:

• Establish the company as a sole proprietorship, corporation, partnership or limited liability company

• Create a legal name

• Set up a business phone number

• Get your employer identification number (EIN)

2. Open business accounts

Once your business is legally formed and operating, your priority will be adding data to your business credit report. You’ll want to open business accounts with vendors that report to the credit bureaus. Keep in mind that not all vendors or business lines of credit are reported to the credit bureaus. 

Additionally, it’s important to open some bank accounts for your business. This will help you secure a business credit card and establish a relationship between your company and a bank. That relationship will be helpful down the road if you ever need a small business loan. 

3. Maintain a good payment history

A significant portion of your credit score is made up of your payment history. One of the fastest ways to increase your business credit is by making all your payments on time and in full. Make sure only to spend what you can afford and set up auto-reminders or auto-payments for yourself, so you never miss a payment. 

Every missed or late payment can be added to your credit report as a negative item and lower your score. 

4. Remember credit utilization 

Once you get access to business credit cards or a line of credit, keeping your spending in check is crucial. This helps you avoid unnecessary debt and benefits your credit utilization. 

A big factor contributing to your credit score is your credit utilization. Credit utilization is the credit available to you versus the credit you use every month. You typically need to keep your credit utilization below 30% to avoid having it negatively impact your credit score. 

So, if you have a business credit card with a credit limit of $15,000, you most likely wouldn’t want to spend more than $5,000 monthly on the card. 

If you find your credit utilization is too high, consider finding a way to cut your spending. Alternatively, you can also get a credit limit increase to reduce the overall credit utilization. 

5. Monitor your credit score

As you build up your credit score, you’ll want to monitor your progress. If there’s a sudden drop in your credit score, you should immediately identify the cause. This can let you fix the mistake before your score is impacted any further. 

Types of business credit

As a business owner, knowing what kinds of business credit you’ll come across is helpful. There are five main types of business credit.

1. Vendor credit

Often if you place large orders with a vendor regularly, it may extend a vendor credit to you. In this case, the vendor will offer its products or services on a short-term financing contract, usually expecting payment net 30 days. 

Vendors will sometimes require a deposit or minimum purchase amount for vendor credit. 

2. Supplier credit

A supplier might offer a supplier credit in which they give you the purchased products and don’t expect payment later. Many businesses like to take advantage of this type of opportunity as it can free up cash flow. 

3. Retail credit

Many stores offer retail credit cards. If your business regularly shops at a particular store, signing up for a retail credit card can be beneficial if it provides additional discounts, points or perks. 

Note that these cards often can only be used in the specific store issuing the card.

4. Service credit

Service credit is one of the most accessible forms of credit to get as an individual or business. This is a type of credit where you receive a service upfront and typically pay at the end of the month. A typical example is receiving utilities, such as electricity, water, phones, cable and internet services. 

5. Business credit cards 

As it sounds, a business credit card is when you sign up for a credit card under your company’s name. If your credit score is too low to get approved for an unsecured business credit card, you could start with a secured credit card while you build up your credit. A business credit card is a great way to build up your business credit quickly (assuming you use the credit card responsibly).  

Start building business credit today

Clearly, a strong business credit score can do a lot for your company. The best thing you can do is to get started as soon as possible working on your credit score. Start taking steps today to build it up so that when you need credit in the future, your lenders will see a business with a track record of being a reliable borrower.