Establishing and maintaining good credit is a key practice for any business. A bad credit score can delegitimize operations, prevent loan approvals required for growth, and force owners to seek alternative and challenging ways to get the financial resources they need. It is important for those seeking to start their own companies to understand the importance of building business credit, as well as the tools they must use if they are to succeed.
How to Build Small Business Credit
New entrepreneurs should consider the following tips when trying to build the financial credit of their businesses:
1.) Separate personal credit from business credit.
During the startup phase of a business, one’s personal credit history is an important factor in successfully launching a company. However, separating business credit from personal credit as soon as possible is crucial. Establishing separate credit gives a business legitimacy, protects the personal credit of owners (should their company get into financial difficulty), may allow the company a distinct legal status and saves trouble during annual tax filings. Ways of separating personal and business credit may include maintaining separate checking accounts and credit cards, or establishing the business as a limited liability company (LLC).
2.) Obtain a federal tax identification number.
Officially called an Employer Identification Number (EIN), a federal tax identification number allows a business to be recognized by the government. The IRS offers such numbers for free, although business owners must check with their business’s state of residence to make sure no additional registration is needed. Federal tax identification numbers are important to obtain because they are required for many financial functions, including registering with business credit bureaus and applying for corporate credit.
3.) Establish good credit practices.
Good business credit practices are similar to those one might practice as an individual. They include commonsense behavior such as paying bills on time, keeping debt-to-available-credit ratios low, and applying for credit before it is needed. These actions prove to banks and lenders that a company is capable of remaining viable.
4.) Establish a line of credit with vendors and suppliers.
Establishing lines of credit means only doing business with vendors and suppliers that are able to report your company’s payment history to official credit reporting agencies, explains The Wall Street Journal. On a similar note, it is also recommended that businesses register with these agencies, since they are the avenues banks use when approving loans.
Following these tips ensures that companies and company owners place themselves in healthy financial positions where their enterprises are able to grow and flourish.
Benefits of Having Good Business Credit
There are many benefits to having good business credit. Some include:
• Obtaining flexible payment terms
• Having access to cash on demand
• Building a positive reputation in both the business community and among vendors and suppliers
• Demonstrating business growth
Ultimately, building credit for a small business is a process that takes both time and intentional effort. However, for those willing to put forth the work, it is a worthwhile and lucrative process.
Continue Your Education Online
Understanding the function of credit in business operations can help future entrepreneurs gain insight into the fundamental practices of how to achieve their goals. Earning a degree like the online business administration degree from Husson University can help, providing a relevant curriculum that can be applied to numerous fields. Students learn theoretical and practical applications of business-related disciplines such as accounting, marketing, management and economics.