The following post is a guest post by Joy Mali. She is an active finance blogger who is fond of sharing interesting finance management tips to encourage people to manage their personal finances. If you have a small business of you’re own, then this article is great for you.
Being in business has always had its challenges and problems. Having the ability to provide for the financial needs of a business is, perhaps, more complicated now that having a good credit score is so important.
Good credit isn’t just a concern for individuals. Even businesses should be concerned with their credit reports and the information that others see. When you are trying to work with various vendors and suppliers, showing that you can be trusted to pay your bills on time may determine whether or not they extend a line of credit to you. Once you can acquire 30-day or 60-day terms with your suppliers, you can now have an easier time growing your business. The benefits of having good credit can make a real difference in how well your business can grow and develop. Here are some ideas that can help you establish a good credit score.
- Incorporate. By putting yourself into a corporation rather than a sole proprietorship or partnership, you are able to separate your personal finances from your business ones. Your personal credit score means nothing when your business is incorporated. You will need to secure a federal employee identification number (IEN), which is the equivalent of an individual’s Social Security number.
- Establish a credit file. You need to contact the three business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business) to establish a credit file. They will then begin to track your business’ finances and its dealings with credit. Ask your vendors and suppliers to contact the bureaus, as well. Not all vendors will do this automatically, and some are very slow at filing statements. Stay on them.
- Vendor line-of-credit. After doing business with a vendor for a couple of months, ask them to consider giving you a line-of-credit. This will allow you to get supplies without paying for them up front. This can give your business much more flexibility and room to grow.
- Be responsible. Now that you have some credit relationships with vendors and suppliers, be sure to pay them on time. While they may be slow in reporting your business’ good behavior, they will be very quick to report negative behavior.
Small Business Credit Cards
Once you have established a good credit history, you might want to consider opening up a small business credit card. This allows you to make purchases with suppliers whom you haven’t yet established credit terms. Using a business credit card will give you the same advantage of buying materials and supplies up front without any capital outlay. Whether you hold the credit card yourself or entrust it to one of your employees is a judgment call that only you can make. However, if you have someone you trust, letting him or her be the card holder keeps you from having to be involved in every purchase.
Of course, in order to get a credit card, you need to make sure that your business credit report is accurate and reflects your good business practices. Every time you apply for a credit card or other line of credit, the lender will do a credit check to see if you are worth the risk.
Checking Your Credit
A small business credit score isn’t really any different than your personal credit score. By maintaining a good credit score, you will have an easier time getting larger business loans and better terms. You might be wondering, “What is a good credit score for a business?” It depends on which rater you are getting information from. If you are looking at the same credit bureaus that report personal credit reports, you will see a range from 0 to 70. The lower the score, the lower risk you are — which means the greater your chances of getting a loan. Others use a rating of A through F, which, like a school report card, an “A” is the best rating and an “F” is the lowest.
In order to find out what your credit rating is, you need to contact each credit bureau to get a copy of your credit report. If you are trying to grow your credit score, you may want to request your credit report once a month. Even after you have established a good credit rating, you may want to check your report monthly just to be sure you are maintaining that good rating.
Your business needs to have a good credit score just like you do for your personal finances. Failing to pay your bills on time will quickly damage your rating, and vendors and suppliers will stop doing business with you. If you don’t repair that damage quickly, your business may soon find itself in serious financial condition.
Photo Courtesy of 401(K) 2013