- What is business credit?
- What does business credit do for you?
- How is business credit measured and built?
- Building business credit with Alliance
Q: What is business credit? What steps can I take to improve my business credit without having any prior history?
A: Business credit is a system of evaluating a business’s creditworthiness and financial reliability. It uses past performances like payment behavior, credit history, and other factors to determine how likely a company is to repay debts. To improve your business credit without a prior history, you should pay bills on time, start a business bank account, and keep personal finances completely separate from your business’s.
Predatory money lending is a nefarious practice designed to keep those without money in the same situation.
Practices like payday loans, title loans, predatory mortgages, and high-cost installment loans actively target individuals with few financial alternatives and trap them in a cycle of debt and repayment.
Some states have updated their regulatory practices to keep consumers safe, but many states still allow bad actors to take advantage of individuals and businesses alike.
Expensive fees, absurd interest rates, and other terrible terms create a feedback loop wherein those who need these services suffer from using them, forcing them to continue needing the services and so on.
If you’ve recently started a business, you’ve likely experienced predatory money lending. Lenders and creditors will try to force new business owners to use personal guarantees to ensure they receive a return on their investment.
Thankfully, with good business credit, you can negate these bad actors. But what is business credit?
In this article, we’ll answer that question, explain what business credit does for your company, see how business credit is measured, and how building business credit with EIN works. Finally, we’ll look at how you can use one of Alliance’s Virtual Offices to help build your company’s credit.
So, if you’ve ever asked questions like “What is business credit used for?” or “What is business credit called?” – then keep reading.
- What is business credit?
- What does business credit do for you?
- How is business credit measured and built?
- Building business credit with Alliance
What is business credit?
An easy way to describe business credit is by comparing it to personal credit.
Read more: Small Business Loan vs. Line of Credit: A Guide
With personal credit, individuals’ financial histories are tied to their social security number (SSN). For business credit, a company’s financial history is tied to its employer identification number (EIN).
Below, we’ve added additional context to help you better understand questions like “What is business credit score called?”
Business credit refers to a business’s ability to obtain loans or lines of credit from lenders, suppliers, and other creditors based on its creditworthiness, financial history, and reputation.
Business credit is separate from personal credit and is based on the financial and operational performance of the business rather than the personal credit of the business owner or partner.
That said, some lenders and creditors may try and convince unsuspecting business owners to add personal guarantees to their loans or lines of credit, which is the furthest thing from what you should do.
If your company is new, you likely don’t have any credit history or enough paid bills and other applicable payments to show meaningful longevity. These are the situations where lenders and creditors will attempt to talk you into being a personal guarantor for your business loans.
Building business credit with EIN alone is difficult, but you should never risk personal liability and the combination of personal and business finances to help your business. It’s unsustainable, and the ramifications of doing so can be dire.
Business credit can help a business access capital for growth, expansion, and day-to-day operations, without relying solely on personal funds or assets. Realistically, you should do everything in your power to keep personal funds and assets separate.
Building and maintaining strong business credit requires a consistent record of paying bills on time, managing debt responsibly, and maintaining a positive credit history.
A good business credit score can also help a business secure better terms and rates on loans, credit lines, and other financing options, making it easier to manage cash flow and invest in future growth.
Read more: How to Build Business Credit: Building Credit for Your Small Business
Building your business credit from the ground up can be difficult, and the temptation to add a personal guarantee may be strong, but you should avoid doing this for several reasons:
- Risk to personal assets
- Personal guarantees put your assets and finances at risk. If your business defaults on the loan, the lender can then pursue personal assets to recover outstanding debt, which may lead to personal financial ruin.
- Limited liability protection
- You secure an LLC for your company because of its liability protection. A personal guarantee effectively negates this protection, as you become personally responsible for the loan.
- Negative impact on personal credit
- When a personal guarantee is reported to credit bureaus, it can affect your personal credit score and history, especially if the business defaults on the loan.
- Loss of control
- Some personal guarantees may involve relinquishing some level of control over your business. This may include conditions or demands that remove your decision-making abilities or require the lender to approve specific business decisions.
And this is just the beginning. Using a personal guarantee to build your business credit sets your company up for a long and difficult road should anything go south.
The benefit of having a good business credit profile
Running a business is a lot of work. Staying on top of payroll, keeping employees and customers happy, and ensuring that you’re following all your locality’s regulations requires careful attention and at times, may require a capital injection.
Read more: Payroll Loans for Small Business: Why Your Business Credit is Crucial
Unless you were already wealthy before you started your business, chances are high that you’ll eventually approach a situation that requires extra capital. This is where having good credit comes in.
We’ve put together a small list of some of the benefits of having good business credit below, so if you’re still wondering, “What is business credit score?” – keep reading.
- Access to funding
- Improved cash flow management
- Better vendor relationships
- Increased credibility
- Separation of personal and business finances
- Lower insurance premiums
- Better opportunities for partnerships and B2B relationships
- More favorable loan and credit terms
Access to funding
With good business credit, a business can access a wide range of funding options, including loans, credit lines, and trade credit.
This can help the business meet its financial needs and pursue growth opportunities.
Lenders check your business’s credit because they want verifiable proof that your company is trustworthy enough for them to risk providing you with a loan.
The more extensive and the better your credit history is, the more likely your company is to get access to a variety of loans and lines of credit.
Improved cash flow management
Business credit can help a business manage its cash flow more effectively by providing access to short-term funding to cover expenses and bridge cash flow gaps.
Unfortunately, there are going to be times when money is tight. In these cases, a capital injection is often what makes or breaks a particular business.
With positive business credit, you can access short-term funding without settling for terrible conditions and use the funds to get through periods of an economic downturn or lull in public interest to keep your company afloat.
Better vendor relationships
With a strong business credit score, a business can negotiate better terms and discounts with suppliers and vendors, improving its purchasing power and reducing costs.
Business relationships and personal relationships function almost identically. With good relationships between your company and its vendors, you can often access better pricing and more forgiving lines of credit.
With good business credit, your vendors know that you’re trustworthy. The more trustworthy they consider your company, the better it will be to deal with them.
Increased credibility
Having good business credit can enhance a business’s reputation and credibility in the eyes of lenders, investors, and other stakeholders, making it easier to secure financing and attract new customers.
A legitimate business pays its debts. Good business credit shows the outside world that you’re running tight operations and that your company is credible, professional, and financially intelligent.
Separation of personal and business finances
Establishing business credit allows a business owner to separate personal and business finances, protecting personal assets and credit history in case the business runs into financial difficulties.
The reason entrepreneurs register for LLCs is to protect their assets and personal liability. When you have poor business credit, you’ll be asked to provide personal guarantees when you try and take out loans, which is a quick way to bring your business’s financial woes directly into your personal life.
Lower insurance premiums
With good business credit, you can negotiate lower insurance premiums for a majority of your company’s insurance needs.
Because insurers often use a company’s credit history to determine the premiums a business will pay, a strong business credit profile can result in serious savings.
Better opportunities for partnerships and B2B relationships
The better your business credit is, the better your reputation is. The better your company’s reputation, the more attractive your business will seem to other businesses seeking outside partnerships or strategic ventures.
Naturally, you shouldn’t partner with every company that wants to do so. Still, good business credit helps your business attract other companies looking for joint ventures, collaboration, or even simple strategic partnerships.
More favorable loan and credit terms
Lenders, creditors, and banks alike will offer your company better terms, rewards, and benefits on your business loans or lines of credit if you have a strong business credit profile.
Whether it’s higher credit limits, good rewards programs, or lower interest rates, these savings will permeate other aspects of your company, allowing you to better invest your capital into operational and logistic tasks to improve your business infrastructure.
Good business credit allows your company to weather almost any storm.
Sure, massive public outcry or a large scandal could decimate any company, but with solid credit, you have access to the capital you need to bridge any gap.
How is business credit measured and built?
Building business credit with EIN exclusively, rather than using a personal guarantee or another muddying of personal and business finances, takes a lot of work.
Read more: How to Build Small Business Credit: 5 Key Steps
We’ve put together another list of actionable tips your company can use to bolster its credit score, so keep reading for more.
- Incorporate your business
- Obtain a business credit card
- Pay bills on time
- Monitor your credit report
- Establish trade credit
- Get a Virtual Office
Incorporate your business
One of the first steps in building business credit is to incorporate your business as a separate legal entity.
This creates a clear distinction between personal and business finances, which is paramount for building business credit.
With an LLC, you’re protecting personal liability, assets, and finances from anything that should go wrong within your business – as long as you’ve not provided personal guarantees or used personal funds for your company.
Obtain a business credit card
The answer to “What is a business credit card?” is straightforward, and so is how your business credit score affects your eligibility.
According to Forbes, businesses should never use more than 30% of their credit limit if possible. Any more than 30% and your credit score may be negatively affected.
Applying for and using a business credit card responsibly is an effective way to establish credit history and improve your business credit score, but remember, you need to make payments on time while keeping your credit utilization low.
Pay bills on time
Paying bills on time is one of the most important factors in building and maintaining good business credit.
This includes paying all business expenses on time, like rent, utilities, and vendor invoices.
Not only does this bolster your business credit score, but it will also create better relationships with vendors.
Monitor your credit report
Regularly monitoring your business credit report can help you identify and address errors or fraudulent activity that could negatively impact your credit score.
You can obtain a copy of your credit report from a credit reporting agency, but your bookkeeping should be good enough to ensure that you always have a reasonable idea of where your business credit is.
This way, if something’s amiss with your credit report, you can search your records to determine the issue.
Establish trade credit
Building relationships with suppliers and vendors who offer trade credit can also help you establish and improve your business credit.
Trade credit is a B2B arrangement in which a supplier (vendor) allows a customer (your business) to purchase goods or services on credit with payment due at a later date. So, instead of requiring instant payment, the supplier provides a specific period within which your company needs to settle the outstanding balance.
Be sure to make payments on time and maintain good relationships with your vendors to build a positive credit history while hopefully getting more attractive prices and better deals with said vendors.
Get a Virtual Office
Banks look at several factors when deciding on loan terms and approvals for businesses.
Having a professional address rather than a residential one or a PO box sends the message that you’re serious about your company, helping you get the loans and lines of credit you need to grow your business credit.
With one of Alliance’s Virtual Offices, you get a prestigious and recognizable business address that shows lenders and creditors how serious you are. Not to mention, Alliance’s various services can save you time, effort, and capital that can then be reinvested into your company.
Building business credit with Alliance
Thanks to widespread fear about the recent collapse of U.S. banks and rising interest rates, borrowing money is difficult.
Naturally, the ease with which companies can borrow money ebbs and flows, but when interest rates are high and banks are frightened, only the companies with excellent business credit can effortlessly borrow money.
Business credit is a powerful tool for any business. Don’t neglect to build your business credit, as it can open new opportunities for growth and help you weather sudden economic downturns.
Keep in mind, you should avoid using a personal guarantee at all costs. Alternatively, with one of Alliance’s Virtual Offices, you can start building business credit with ease.
With a professional address, you’re enhancing your company’s credibility and legitimacy and making it easier for lenders, suppliers, and potential partners to feel comfortable dealing with your business.
A professional address can positively impact your business credit profile by showing outside entities stability and a level of professionalism that just isn’t seen in home offices or PO box-based digital addresses.
In addition, a Virtual Office helps you keep your personal and business finances separate.
Separation is crucial for maintaining clear distinctions between your credit and your business’s credit, which credit bureaus and lenders alike will consider when assessing your company’s creditworthiness.
When your personal and business finances are combined, there’s a lack of clarity about what is yours vs what is your company’s.
It becomes difficult for lenders to make fair assessments of the financial health and creditworthiness of the business and may make it difficult to determine your company’s actual revenue, expenses, and most importantly, profitability.
Outside of the reasons that make your company more attractive to lenders, investors, and potential clients, a Virtual Office from Alliance also provides countless amenities you can use to further improve your business’s image while simultaneously saving your time, money, and effort.
With one of Alliance’s Live Receptionists, you provide a friendly and professional voice that personally screens and answers all incoming calls, allowing you to focus on your company’s operational needs.
With access to meeting rooms, you have a quiet and professional place to host both in-person and virtual meetings for any number of attendees.
Similarly, access to coworking spaces provides your company with excellent networking opportunities and a space shared with other motivated entrepreneurs and business owners.
With a Virtual Office, you’re getting all of the benefits of traditional office space without sacrificing the flexibility of remote work. Using this to your advantage allows you to build a robust business credit profile that can help you access funding whenever you need it.
Further reading:
- How to Build Business Credit: Building Credit for Your Small Business
- Payroll Loans for Small Business: Why Your Business Credit is Crucial
- Small Business Loan vs. Line of Credit: A Guide
- How to Build Small Business Credit: 5 Key Steps
Alliance Virtual Offices provides Virtual Office services and other digital tools to established entrepreneurs and new ventures alike.
Instead of asking, “What is business credit?” consider using Alliance’s suite of helpful services to create a positive image for your business that can be leveraged into building a healthy business credit score.
Whether you do this with a business credit card, a running line of credit, or a lump sum loan is entirely your choice, all that matters is that you start building strong credit as soon as your business gets off the ground.
Contact us today to see how Alliance’s Virtual Offices can bolster your business credit!
