New small businesses have a lot on their plates when it comes to kickstarting their business. According to the U.S. Small Business Administration, this can include conducting market research, writing a business plan, submitting necessary documents and preparing for launch of the business. While small business owners may not feel like they need one more thing to worry about, it’s critical that they don’t forget about one especially important component to building the foundation for their business – establishing and maintaining a good business credit score.
Good business credit is the lifeline of any small business. Lenders use business credit to gauge financial risk and make lending decisions that affect how much capital small businesses can access. It helps with securing loans, credit cards and can help them receive more favorable borrowing terms like lower interest rates.
It can be overwhelming knowing where to start so understanding some of the key components of business credit can make it easier. There are a few important things to understand including – the difference between personal and business credit, how to establish and maintain business credit and what a good business credit score is. Knowing these basics can help small business owners be on their way to building a healthy and robust business credit history.
Separating Personal Credit from Business Credit
Small business owners may consider taking a loan under their personal credit to get started, but this can be a hinderance to their business in the long run for a few reasons. First, if their business becomes at risk, their personal credit will also become at risk. Keeping personal and business credit separate protects against financial mishaps that may occur on one credit profile from affecting the other, meaning something that occurred on their business credit won’t be reflected in their personal credit, and vice versa.
Additionally, intertwining personal and business credit can actually stifle opportunity. For example, if a small businesses owner takes on extra personal debt, that can lower their credit score, which can prevent them from accessing more affordable credit options for their business in the future. Building separation between the two can also help their business develop the credibility that matters to banks, lenders, suppliers, and partners.
Establishing Business Credit
Small businesses should establish credit as soon as possible. The best first step to building credit is by setting up the name for the business. The steps to do this include:
- Incorporate or form an LLC (Limited Liability Company) to ensure the company is seen as a separate business entity.
- Obtain a federal Employer Identification Number.
- Open business bank accounts, business credit cards, commercial loans, leases, and utilities in the legal business name rather than a personal name.
- Set up a dedicated business phone line in the business’s name and ensure it is listed.
Once the business has established its name and is recognized as a business entity, a business credit file with Experian can begin to collect reported data and trades that will be reflected in the business credit report.
Building Good Business Credit
In order to build and maintain good business credit, it’s important to understand the factors that can affect a small business’s credit score. This may include historical payment behavior, number of trade experiences, credit utilization, outstanding balances and derogatory items such as collections, liens and bankruptcies.
Next, small business owners should practice good financial habits that will keep their credit healthy. This includes making sure they limit their debt, pay their bills, loans and other accounts on time or early, and regularly monitor their business credit report for changes or potential issues that can impact their credit.
What Exactly Is a Good Business Credit Score?
Most business owners are likely familiar with consumer credit scores which can range anywhere from 300 to 850 depending on the scoring model. Business credit is expressed with a different numerical range than personal credit. Business credit scores provide a quick view of a company’s risk potential based on a scale of 1 to 100 — the higher the score, the lower the risk. Similarly, what is defined as a good business credit score also depends on the scoring model and criteria used. With that said, there are some general guidelines that can help business owners understand where their business credit stands.
The Federal Reserve’s 2022 Small Business Credit Survey defined a business credit score with a lower lending risk as a score that falls in the 80-100 range. As the lending risk increases, the business credit score range decreases. As a rule of thumb, small business owners should strive for a higher credit score to ensure that they have access to the options and resources they need to help their businesses thrive.
Business owners should regularly check their business credit report to keep tabs on their score and monitor the health of their business.
Establishing business credit should be a priority for small business owners in order to set up their business for success in the future. By following the steps above, business owners can build and maintain a credit score that can help them continue to access the capital needed to grow their business and serve their customers today and beyond.
Brian Bond is the Senior Vice President of Product, Marketing, and Strategy for Experian Business Information Services.