Personal credit may help secure your first loan, but a solid business credit score opens up significant financial opportunities for your company. While personal credit reflects individual financial behaviour and history, business credit evaluates your company's creditworthiness based on its operational history and payment track record. It's important to maintain both scores to secure financing, negotiate favourable terms with suppliers, take advantage of expansion opportunities, reduce insurance premiums and provide a financial safety net during emergencies.
Building business credit
Equifax, TransUnion and similar agencies assess business credit scores based on factors that gauge your business’ financial health.
What influences your business credit score?
- Payment history: Timely payments are crucial.
- Credit utilization ratio: Maintain a healthy ratio of credit used to credit available.
- Credit history length: Longer histories reflect positively.
- Credit mix: Diverse credit types can be beneficial.
- Public records: Bankruptcies and liens can lower the score.
- Business size and age: Larger and older businesses may have higher scores.
- Industry risk: Some industries are riskier than others.
- Business relationships: Positive relationships with suppliers and lenders can help.
- Financial performance: Revenue, profitability and cash flow influence creditworthiness.
- Credit inquiries: Multiple inquiries can lower the score if they occur within a short period.
How do you build business credit?
Consider these tactics to build a strong credit profile:
- Timely payments: Ensure prompt payment of all business expenses.
- Low credit utilization ratios: Maintain low ratios by managing debts responsibly.
- Diversify credit types: Use various forms of credit like business credit cards and loans.
- Manage different types of credit: Handle different credit types responsibly to build a robust credit history.
- Monitor credit report: Regularly check for inaccuracies and discrepancies.
- Stay vigilant: Actively manage errors or inconsistencies in your credit report.
- Prevent potential issues: Proactively address errors to avoid negative impacts on your credit score.
Cultivating strong relationships with suppliers, vendors and financial institutions can facilitate your future credit needs. Regularly assessing financing options and seeking professional advice means you’re being smart about growing your business.
When things don’t go as planned
If your business hits a rough patch and things don't go as planned, it can put a dent in both your personal and business credit scores—especially if you're personally tied to any business debts or loans. If your company is set up as a separate entity, its financial struggles ideally stay separate from your personal finances. But if you've personally guaranteed any business loans or lines of credit, or if you've mixed personal and business funds, then the impact can spill over onto your personal credit score. Missed payments or defaults on business loans or credit cards can drag down both your personal and business credit scores, making it tougher to secure financing later.
Having distinct accounts and promptly fulfilling financial commitments can help mitigate the impact if your business encounters difficulties. By staying on top of things and managing finances responsibly, you can navigate hard times while minimizing the impact on your credit scores.
Recap: Boost your scores
Establishing business credit is not just a matter of financial prudence; it's a strategic necessity. While personal credit may secure initial financing, a solid business credit score can open a realm of financial opportunities for your business. Factors influencing business credit include payment history, credit utilization ratio, credit mix and industry risk. Tactics for building business credit include timely payments, low credit utilization, diversifying credit types and maintaining strong relationships with suppliers and lenders.
Keep in mind: if your business fails, it can impact both personal and business credit scores, especially if you provided personal guarantees for business debts. Maintaining separate accounts and fulfilling financial commitments promptly are crucial for minimizing the impact on credit scores if your business goes under.
