Many businesses, more so those that are just starting out, rely heavily on the owner’s credit for loans and other kinds of borrowing. This is disadvantageous to both the business and the owner. Business credit is important because it draws the line between your personal credit and that of the business. With a shared credit profile, financial issues will spread from one entity to the other (i.e. from the business to your personal credit and vice versa) often with damaging effect.
Establishing business credit is not only important for separating you and your business, but it also gives your business access to bigger loans – business can borrow up to 100 times more than an individual – and provides a safety net for your business in case emergency financing is needed. (Source: https://www.sba.gov/blogs/importance-building-business-credit)
Although the benefits of establishing business credit are compelling, most small businesses still rely on the owner’s personal credit. The main reason for this being that many business owners do not know how to build business credit for their companies.
The process of establishing business credit
Here’s a simple guide to help you build credit for your business.
- Incorporate your business. This is the first step to giving your business its own separate identity. Once incorporated, your business becomes a legal entity separate from you. Sole proprietorships and partnerships are not corporations which means there isn’t a legal separation between them and the owners.
- Set up a business bank account. Your business requires at least one bank reference. To get a loan from the bank, the account will need to have been active for a certain duration of time. The cash flow of the account should also show that your business is capable of taking on debt.
- Register your business with a business credit bureau. Credit bureaus keep records of your credit history and how your company handles debt. This information is made available to potential lenders and determines whether they will extend credit to you or not.
- Develop a good business credit history. The easiest place to start building credit history is from your suppliers. Start buying business supplies on credit and make sure the vendors report your payment history to your business credit bureau. Reports of good payment history by vendors will help boost your credit score. So always ensure your debts are well managed and invoices are paid on time.
Although it takes a bit of an effort to establish credit for your business, the rewards it stands to gain make it worthwhile. The trick is to start early so that your business has an established credit line when it needs it.
Access real-time credit referencing information with New Zealand’s first, and most comprehensive, positive trade debtor (positive data) credit referencing system: http://www.creditworks.co.nz/