While most of us understand personal credit – pay on time, don’t rack up too much debt – business credit tends to be somewhat of a mystery, especially for newer entrepreneurs.
For instance, one mistake that many make is that they co-mingle their personal and business credit. When someone starts a business, they likely have no business credit and so their personal credit is used for business purposes. While that may be a simpler way to start out, it is also dangerous.
When you take on a lot of debt to start a business, as many entrepreneurs do, even if you pay the debt back regularly it affects your personal debt-to-income ratio and may damage your personal credit score. So it is vital for both the health of your business and your own personal financial well-being that, as soon as is feasible, you establish business credit and separate your personal and business credit lines and scores.
Understanding business credit
Business credit is similar but still distinct from personal credit. Typically, a business establishes unique and separate business credit by
- Getting an Employee Identification Number (EIN)
- Establishing trade credit with other companies.
Establishing trade credit is not unlike how you established personal credit when you were young. Start small, open a few accounts, and work your way up from there.
The value of establishing trade credit and then working to have a good business credit rating is that it will make your future business life much easier. Credit begets more credit; by establishing business credit and maintaining a good business credit score, it will be easier to get loans to grow your business down the road.
Clearing up your business credit
So yes, good credit is vital to small business success; it allows you to get loans at affordable rates, grow, and handle business. Negative credit hampers your ability to run your business properly. And that begs the question: How do you clean up your business credit if yours has suffered?
Here are three ways:
1. Check for accuracy: It is estimated that a billion pieces of new information is reported on personal and business credit reports every month. Given that volume, mistakes are made. For example:
- It may be that a creditor mistakenly reported your business negatively to credit bureaus
- Or they misspelled another company’s business name, a name very similar to yours, and the ding ends up on your report by mistake
- Or an old debt that was paid off is still showing up on your business credit report
Whatever the case, the thing here is that you have to pull your credit report, check it for accuracy, and then challenge those pieces that are inaccurate.
2. Negotiate: OK, let’s say that all of the entries on your report are accurate and you do owe some money or have some past due debts or whatever the case may be. In that case, your best bet for cleaning up your credit report is to negotiate with the creditor(s) in question. Work out a deal and make sure they agree to report your debt as paid once it is paid.
3. Pay in full and on time: Going forward, the best thing you can do to clean up your business credit is to pay your debts in full and on time. Now, that may not seem like a quick solution, but actually, it is. Within a year you will see an improved credit score. And within a few years, your business credit score will be such that you too will be able to get affordable loans, lines of credit, and more.
And when that happens, your business will have grown so much that paying debts late because you don’t have enough cash flow will be a thing of the past.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss
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