Financial Terms: What Is Business Credit?
Before, you may have heard the financial terms business credit and personal credit, but what do they mean? Business credit refers to your company’s ability to borrow money.
It can be tricky for a new entrepreneur or small business owner to get financing when they don’t have an established track record. In fact, following a study by the SBSA, 27% of businesses were not able to get the funding they needed.
Keep reading for a quick guide on understanding Business Credit.
What is Business Credit?
It can be challenging to acquire financing when starting your business due to the lack of an established track record. This is where business credit comes in – securing loans for a new company with no personal credit history (because they’re two separate things).
Business Credit vs. Personal Credit
While both types of credit use financial terms that may seem similar, they are very different.
When you apply for a loan or credit card through your bank, and it is approved, the bank establishes your personal credit score based on how well you pay off that debt (e.g., late payments or missed payments). So, if everything goes smoothly and all of the bills get paid in full and on time, your score will improve as you continue to use that same bank.
Business credit is not the same – it’s established through a financial institution such as a bank but has nothing to do with how well you pay off loans. Instead, business credit is all about whether or not companies trust and choose to work with your business because of its history (or lack thereof).
Why Good Business Credit is Important
When starting a business, it’s all about establishing trust and credibility with the financial institutions that will lend your company money. Banks want to see if they can rely on someone else who is already established in their industry – which is why having good business credit early on is important for small businesses.
How to Build Business Credit
it can be difficult to get financial help for your new business. Fortunately, it’s quite easy to build business credit by using a few simple steps.
Open a Business Bank Account.
The first step is to open a bank account for your company. You may want to use a different bank than the one you used for personal banking or that of another business, depending on what is most convenient for you and best fits your financial needs.
This step helps you to manage your finances in a way that boosts confidence.
Get a Business Phone Number
Next, you will need a business phone number. This is important because it separates your personal credit from your company’s financial information and track record.
You don’t need to use an expensive business number and can save money by using a virtual phone service.
Open a Business Credit File
Once you have a bank account and business phone number, the next step is to open a business credit file. This will allow your company’s financial information to be shared with other banks and lenders when you apply for loans in the future. Make sure to open this file with all three big reporters – Experian, Equifax, and TransUnion.
Pay Your Bills on Time
You can improve your overall business credit score by making sure all bills are paid on time, keeping up with regular payments, and not maxing out lines of credit. This helps to show good financial management.
Get a Business Credit Card
A small business credit card may also be an option if it is used responsibly, but make sure to pay off the balance at the end of every month so that there are no interest charges or other fees tacked on.
Understanding Financial Terms is Easy
Establishing good business Credit early on in the game can make all the difference for small businesses when seeking financing or lines of credit. It also helps to create credibility with potential new customers so that they know your company is trustworthy and reliable.
Now that you understand the financial terms related to business credit, why not check out the rest of our business section?