Building business credit is like building trust. The more of a clean track-record you have with paying debts, the more likely you are to be trusted in the future with them. Think of it as a resume – if a resume exemplifies how well you’ve performed at previous jobs, your credit is a history of your finances, and how well you’ve paid off debts. Your lenders are your references, and they keep a trail of how well you’ve repaid them. They then report that history to compile a credit score. If you perform well at a job, it builds your resume. If you don’t, then not so much. If you have a good resume and you have a good track record with your employers, you’re more likely to get more interviews and job offers – credit works the same way. When used responsibly, it will get you approved for more – and better – loans.
Why is establishing business credit so important? It can deeply affect your potential to get funding. In an article published by the Small Business Administration, they cite that the Nav American Dream Gap Survey revealed in their 2015 study that 45% of small business owners did not know they have a business credit score, 72% didn’t know where to find information on it, and 82% didn’t know how to interpret it. This narrates exactly why learning about and establishing your business credit is so important.
Many business owners don’t understand their credit health, and it can in-turn affect the financial health of their business. Here’s our take on why business credit is so important.
Along with providing a service to your customers, growth is usually one of the top long-term goals of a business. Building business credit is important because it helps prepare your business for the future. If you want your business to grow, you have to first establish some sort of credit. Business credit is used to determine if your business is qualified for different financial products. The more credit you have, and the better that credit is, the more purchasing power you have. Your purchasing power is exactly how much you have to invest in new assets, and if you maintain good credit, it runs parallel with your company’s growth.
Business credit also increases your chances of getting financed with favorable terms. If you build your credit, you’ll receive loan amounts, interest rates and term-lengths based on it. The higher your score is, the better these terms are – you’ll get higher loan amounts, lower interest rates, and ideal term lengths. Higher business credit can also get you lower rates on insurance.
Whether it be through a business credit card, a line of credit or getting a loan, building your business credit shows that you can pay lenders back. This builds your track record, proving you’ll be able to take out more loans in the future. Thus, contributing to your business’s growth.
Net 30, Net 60 Approval
It’s not only banks that use credit. If you deal with paying by invoice, having little or no credit can make it harder for your vendors or distributors to approve you for Net 30 or Net 60 terms. Why? Because if you don’t have credit built up, they don’t have anything to go off of. Since an invoice is essentially a form of debt, if you don’t have a record of paying back your debts, they’re less likely to trust you with a new one.
Unlike personal credit, business credit makes your business public. Only you and a few other certain parties (lenders, for example) can see your personal credit. This isn’t the case with business credit – as long as an individual or company is willing to pay for it, anyone can see your business credit score.
Since business credit is public information, customers or partners can use that information to determine if they want to do business with you. This might sound intimidating, but most of the time, people won’t want to do business with a company that doesn’t have their credit information public. If you’re not actively building and adding to your business credit score, people will see, and that could mean less business for you.
Personal Credit vs. Business Credit
According to Experian, one of the credit score reporting agencies, keeping your personal and business credit separate is vital. It’s risky to intertwine your business finances with your personal finances, but there are other actual benefits of separating them. Many lenders and creditors are leaning away from relying on personal credit when trying to judge a business’s financial health because it’s not a great predictor for a business’s behavior.
Nerdwallet also says that keeping business and personal credit separate can be highly beneficial when it comes to tax season. It makes it that much easier to track your business expenses for tax purposes, and it’s always better to be on the safe side when it comes to the IRS.
How Can FaaSfunds Help Build Business Credit?
What if you could have on-demand assistance to help you establish your business credit? What if there was a way to manage personal credit and also see how it affects your business’s financial health? FaaSfunds exists to do just that. We’re here to help monitor and make suggestions to help your business credit and navigate the complicated world of making financial decisions. Don’t be part of that 82% that doesn’t know how to interpret their business credit – let FaaSfunds help.