If you own a small business, here’s a bit of news for you: you have a business credit score. That’s right, you’re not only responsible for your personal credit score, but you also have a separate score that lenders, vendors and even business partners use to determine the creditworthiness of your business.
This can potentially add to the already stressful life of a business owner, especially if you’re already concerned about bad or otherwise limited personal credit. There is good news, however: there are ample opportunities to not only work on and improve your business credit, but to establish personal credit through your business.
Know Before You Go
There are a number of details you likely already look for when applying for financing for your business. Interest rates, monthly payments, and how quickly you can access the capital are the short list, but if you’re looking to establish personal or business credit, there are additional details that should be key to your decision.
In terms of reporting payments to the credit bureaus, not every bank or lending institution is created equally, and they certainly don’t operate equally. This article from Nav gives details on which what information certain business credit card distributors report to personal credit bureaus. Keep in mind also that business credit is far less regulated than personal credit, and take care to find the cards or options that will report your timely payments and good credit behavior to the business credit bureaus as well.
Taking the time to find the perfect balance can help you get to work on establishing credit history in no time.
Alternative Options
Business credit cards will likely be the most common financing option to help establish personal credit through your business. However, with some creativity and responsibility, there is another way that can help. Please keep in mind that creative does not mean illegal, and you should always be aware of tax laws and other regulations regarding business expenses and operations.
You likely used savings or other cash from your own bank account when you started your business, which is very common. While your personal savings may be limited or taking from your savings may not be conducive to other goals of yours, a personal loan could be a helpful option.
Once approved for a personal loan, that cash can be used for your business, and your income from the business is then used to pay off the loan. This option comes with a major, major caveat: to not get your personal and business finances mixed up. If you haven’t opened a separate business checking account for your small business, do so immediately. A Nav survey found that 70% of small business owners who hadn’t opened a checking account were denied for financing. Besides causing issues in getting financing, having both expenses mixed together can create substantially more work for yourself and cause more stress.
By keeping your finances separate, taking steps to establish credit through financing can go that much simpler for you.
Best Practices
Whatever your goals are regarding your credit, there are simple guidelines that you should always follow. Be sure your payments are made on time, or even early if possible. You should also aim to keep your debt utilization ratio as low as possible. Your timely payments and debt utilization ratio are two of the most significant considerations when calculating your credit score. Monitoring your credit is also crucial if you’re trying to make any kind of progress, you can do so for free with Nav.
This article was originally written on October 29, 2018 and updated on October 31, 2018.
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