What is Business Credit?

Credit is your ability to borrow money (or get something now and pay later). You’re probably familiar with the concept when it comes to your personal credit scores, but credit for your business is separate from your personal credit – at least it should be.

If you run a business, get familiar with business credit, and start building it so that you can leave your personal credit out of the equation.

Why Use Business Credit?

You can borrow money as an individual, so why go to the trouble of borrowing in the name of your business?

Keep things separate: even if it’s not a big deal now, someday you’ll thank yourself for separating your personal and business finances. To get a loan as a new business, you probably need to apply using your Social Security Number, which means lenders pull your personal credit reports and make a lending decision based on your credit. That also means that any problems will go on your personal credit reports – making it more difficult to borrow for important purchases like a home or automobile.

Even if all goes well, loans for your business can eat up your ability to borrow as an individual, and that will affect you and your family. Lenders evaluate how much you can borrow based on your income and your existing debt payments (using a debt to income ratio). You can easily get maxed out if you borrow for business.

Until you establish business credit, lenders will require a personal guarantee, even if they approve a “business loan.” You’ll need to put assets such as your home on the line, and those assets serve as collateral for the loan.

This can lead to disaster, and it makes it harder to move or refinance while your business loans are still outstanding.

Better terms: a solid business credit score makes it easier to operate. Suppliers are likely to allow more time for repayment, and you’ll have more choices – you can work with high-quality, dependable firms instead of whoever will take you as a customer.

Better financing: when you borrow, you’ll pay less if you have strong business credit. Loan pricing is typically based on risk. The more likely you are to repay, the lower your interest rates and other finance charges. This improves profitability and provides more breathing room.

Increased sales: your credit isn’t just about borrowing – it can also impress potential customers. Customers want to know whether or not you can deliver on their orders, and your business’ credit score is one way to evaluate your operation. If you always follow-through for suppliers, customers are more comfortable placing a big order.

Unlike your personal credit scores, anybody can view your business credit – it’s not confidential, and they don’t need a reason to ask.