Starting a new business from scratch usually involves several considerations from saving money, marketing the merchandise, to selling products and hiring employees, with business credit often taking the backseat.
This should not be the case. Building business credit should be treated with equal importance to other activities as it’s also crucial to building a successful business.
This is because business credit is an economic resource that makes up the financial foundation of your company.
What is business credit?
Business credit is somewhat similar to your personal credit, in that your business’ credit score will determine whether your company is trustworthy when it comes to handling money. Think of it as a gauge for your company’s reputation.
Among other things, your business credit reveals any signs of bankruptcy or delinquent payments, which could greatly affect your chances of creating future business relationships.
If your company’s credit history is poor, investors and potential lenders may not be willing to partner with your business as it would be categorised as a high-risk endeavour. Nobody wants to take risks with their money, so if the odds are not tipped to your company’s favour, nobody will be placing their money on it. It’s not only investors and lenders who pull business credit information to determine whether they will do business with your company.
Suppliers do it to know whether your company pays its bills and to determine whether to issue trade credit, while buyers will pull credit data to know whether your business is dependable.
Why building business credit is important
Building business credit is important because:
1. It separates you from your business. A business should be a different entity separate from its owner. Even if you have excellent personal credit, taking a loan for your business in your name is not the best idea. This is because it makes you liable for the debt. And with businesses there is always the possibility of hitting hard times, and if the business cannot repay the loan then that debt will be reflected on your personal credit report. In extreme cases the creditor will also come after your personal assets if the loan is filed in your name. It’s therefore important to build business credit so that you can take loans using your business’ line of credit instead of yours.
2. Increased financial opportunities. With good business credit history lenders will be more willing to loan your company money. A company will also have up to a hundred times greater credit capacity as compared to personal credit. When you combine the two your business will be able to access huge loans at lower interest rates because lenders trust it to pay them back.
3. It creates a safety net for your business. It’s not always that your business needs extra money. But what if sales drop for a couple of months? Will you be able to pay the rent owed by your company? Will there be enough cash to cover employee’s payroll? When you build business credit your company should have no trouble accessing funds when it finds itself in a financial bind. 4. Increased company value. Business credit is fully transferable with the business if you decide to sell.
This makes it an asset that can influence the value of your company when negotiating with a potential buyer.