Do you know the answer to this question? Many business owners don’t.
In 2015, the Nav American Dream Gap Survey reported that 45% of small business owners didn’t know whether they had a business credit score. Within the surveyed group, 72% of those individuals didn’t know where to get information on their scores.
If that’s your concern too, you may wonder how to build business credit and the reasons you should. Many financial institutions, like Camino Financial, offer business resources that can help you with this.
In this article, we’re going to explain the importance of building business credit and how doing so can make a huge difference in your business’s future.
First, let’s find out how one business owner changed his financial trajectory by improving his business credit score. You’ll find out like he did that building business credit can make a significant difference in your business.
A business owner finds out the importance of a business credit score
Samuel has worked from his home for 2 years and built a profitable website and logo design business.
During that time, he has used the same checking account for personal and business expenses. Furthermore, he uses one credit card to purchase business supplies or to buy groceries for his family.
At the end of the year, he sorts out the expenses to prepare his tax returns and reports his business income as a sole proprietor.
Because Samuel has completed numerous design projects, his client list has grown exponentially. Now, he has so much work he’s concerned he can’t keep up. By hiring a part-time employee or freelancer, he can complete more work to increase profit.
Hiring another person would allow him to take on new work and expand his business even further.
He decides to apply for a loan with his local bank. It didn’t take long for the lender to turn down his loan application because he hadn’t established a business credit score.
Being rejected for a loan surprises Samuel because he always pays his bills on time.
What he didn’t know was that lenders look at both personal and business scores to determine a borrower’s creditworthiness. They also depend on these scores to set loan rates and terms.
With the lender’s help, Samuel immediately begins to build his business credit score. The first thing he does is open a business checking account to keep personal and business expenses separate. The lender also encourages Samuel to apply for a business credit card.
Samuel discovers that according to the Small Business Administration, 46% of small businesses use a personal credit card for business transactions. Even though he’s relieved he wasn’t the only one to make that mistake; he wished he hadn’t.
The lender also suggests that Samuel use about 30% of the credit he has available to keep his credit score stable.
So that lenders see Samuel’s business as a separate and distinct entity, he applies for an EIN (employer identification number) and gets a private business telephone line. He also meets with a lawyer to set up his business as a corporation.
By making these changes, customers and vendors will see Samuel’s design company as an enterprising business and not just a part-time hobby.
Thankfully, it only takes Samuel a few days to complete these tasks. Additionally, he continues his good accounting practice of paying his bills on time, so no late payments post to his credit history.
In the next few months, he accesses his credit report to see how these changes affect his business credit score. His overall goal is to have a business credit score between 76-100 to be considered a low-risk borrower. Samuel continues to monitor credit reports and spot any potential problems that might lower his score.
The next time Samuel applies for a loan, the outcome is favorable.
The lender offers him a loan for $15,000, which covers costs to upgrade his design software, hire a part-time employee, and update the terms on his client agreement.
He realized that having a good business credit score helps keep his business moving forward.
After getting a loan, Samuel has more time to travel to prospective client locations and discuss their website needs. Moreover, he finds that by keeping his personal and business expenses separate he’s more organized. His clients gladly tell other business owners about his services so that his design company grows by leaps and bounds.
Building his business credit score was one of the best things he did for his business.
His lender confirmed that, as long as he continues to keep his business credit score in an optimal range, he should get lower interest rates and better terms on loans. If he should need to purchase products or services, suppliers are more likely to offer credit in the event he can’t pay the total amount due upfront.
How building business credit can help you too
Samuel had no idea how important business credit was until he needed funding.
Being turned down for a loan like Samuel happens too much too frequently to business owners.
In an SBA survey, 27% of business owners couldn’t get the funding they needed. Seventy-five percent of those entrepreneurs said the reason they were denied funding was due to business credit.
Many entrepreneurs face the same situation, but they don’t have to. You can build business credit quickly and easily. None of the steps are hard to complete, and you can finish one step at a time.
Not only that, business credit opens doors like having a lease approved, lowering insurance premiums, or getting a business line of credit. Business credit helps you manage cash flow, save money, and provide a safety net during leaner times.
You’ll have access to money for capital expenditures, staffing, and research and development. Having business credit also protects your personal credit when you need to secure financing.
There are just as many reasons to build business credit as there are benefits. Why not build your business’s credit score today?