Marc Serafino
Building good business credit requires time and some common sense thinking — and acting accordingly. In short, you should be responsible and make sure not to take loans your business can’t payoff. Here are some details to know:
1. Establish strong personal credit
As a business owner, you are the most important factor in your business’ credit score; so start by making sure your personal credit score is solid.
Credit card companies typically require that you personally guarantee for any debt your business gets on the credit card. In fact, the law (the Fair Credit Reporting Act) allows the lender to look at your personal credit profile to evaluate whether to issue a loan or a business credit card to your business.
So even before applying for a business credit card, make sure your finances are in order with little to now balance being carried from one month to the other on your personal credit card(s).
2. Manage accounting properly
Depending on the company type, you may be even required to keep good financial records of all transactions. Even if that’s not the case, you should be using some third party software like FreshBooks, QuickBooks or Xero to track expenses and revenues.
These are the tools that work much better than a bunch of Excel files, and provide you with summaries and other useful reports at the end of each period.
Then, when you want to apply for a business credit card or a loan, you can show these reports to the bank from where it will be able to more easily determine whether to approve the card/loan or not.
3. Keep personal and business finances separate
For start, you will want to have a business checking account which will be used to receive any and all payments from clients. Also, you will be making business purchases from this account and while doing so — steadily building credibility in the eyes of the bank.
I guess you can make some personal purchases from your business account — it’s your money after all — but that should be an exception rather than the rule. In fact, you should do your best to keep business and personal accounts as separate as possible.
4. Use your business credit card for business purchases
Related to the previous point, once you get a business credit card – use it exclusively to make business-related purchases. And make sure not to carry too much balance from one month to the other — you should treat is as your personal credit card, which we’re hoping you’re using responsibly as well.
As you’re doing this from one month to the other, credit bureaus and your bank will take note and steadily be increasing your credit score. Then, at some point, you will be able to get even better business credit card, one that offers rewards and some other bells and whistles. Or get a loan with more favorable terms.
5. Monitor your business credit report
Again, once you get a business credit card, make sure you know what’s going on with your credit score. Don’t sweat over it — cause as long as you’re paying off your balance on time, you’re good to go. Also frequent credit score inquiries could hurt your score — so don’t ask for it every month.
You can use the free searches on Experian, Equifax, or D&B to see if your business’s credit is being tracked, but you will have to pay to get the actual report.
The business credit score is calculated differently than your personal credit score. Each of the major credit bureaus uses its own formula, but they all look at same/similar factors, such as how long you’ve been in business, your credit utilization, and the lines of credit you have opened in the last six months.
Finally, if you can’t find your business on the major credit bureaus, you can apply for a free D-U-N-S number with Dun & Bradstreet, which should get the ball rolling.
