Your Business Credit Guide That Gets Down to Business
It does not matter if you have a brand new start-up, or you have a well-established business, they all face the same credit concerns. Even when your business is doing really well and making a large amount of profit, you must work hard to maintain great credit. You also must be careful not to get your business credit tangled up with your personal credit. That could prove to be a disaster for your business and for you personally.
Everything You Need to Know About Business Credit
Your best option is to educate yourself on as much information about credit as you can. When you have a strong understanding of credit, it helps you get and stay on the right track. Continue reading this business credit guide to find out all the information you need to know.
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What Is Business Credit?
It does not matter if you are talking about personal or business credit, credit is the same thing. I am going to start this business credit guide with a simple definition of credit. Credit is your ability to acquire something today with the promise that you will pay for it at some future date. You are probably thinking, "thanks for that, but what does that really mean?"
That means that someone or some entity is allowing you to take ownership of something even though you have not paid for it. You may have made a partial payment, but just not a full payment. You may not have made any type of payment.
Examples of Credit
There are many different examples. Credit cards may be the first example to come to mind. A credit card gives you the ability to buy something today and pay for it over time. Another example is a mortgage for your house, or a loan for your car. These loans allow you to make a large purchase even though you do not have all the money for them today.
Often when we think of credit, we think of big lenders like banks and credit card companies, but they can be small, too. A local business may extend credit to you. Think of your local plumber or heating guy and how they let you pay for a percentage of the work today and the rest after the job is finished, or maybe even 30 days later.
Credit works on two things, faith and a promise. First, the lender must have faith you will repay. Second, you make a promise to repay. Your credit history, which I explain in more detail later, shows if you have made good on your promise. It also guides lenders in how much faith they have in you. It takes a significant amount of time to build your credit, but only a few mistakes destroy it quickly.
Are Business Credit And Personal Credit The Same?
For the most part, credit is credit. It does not matter if it is applied to you personally or to your business. What you really need to understand is that if your personal finances and your business finances are attached, then your credit for one impacts your credit for the other. If you do not separate your business from your own credit, they impact each other, positively and negatively. I am going to say it again because it is worth repeating. If you do not have your business finances separate from your personal ones, they impact each other.
That means if you have bad personal credit, you also have a bad business card. The opposite it also true. In this business credit guide, I would recommend that you keep them separate. Here is why: let us just say for a moment that you have two businesses. One is doing incredibly well and the other one, not so much. There is not much you can do to save the failing business and you decide it just is not worth it.
You feel it is better to focus your energy on the one that is doing well. If all your finances are attached to each other, the business that fails could decrease your credit score for you personally or your other business. However, if you separate them, while the financial implications of the business does not impact your personal credit score.
How Do I Establish Business Credit?
Fortunately, there are a number of steps you can take to establish good business credit. I am going to include some of them in this business credit guide.
1. Create the Business and Market It
This is the first thing you need to do. This may seem like a no brainer but I am not sure it is something everyone considers. No one is going to utilize your business if they do not know about it. You need to put your business out where people can find it. Depending on your type of business, you should determine the best way to market and then go for it. You cannot build up any type of credit, or repay debt, if you do not make money.
2. Create Relationships with Other Businesses
When it comes to establishing credit, you may first think of banks and big lenders, but that is not where you should stop. As a business, you need goods and services from other businesses. In the business world, you can get much further by developing strong relationships with vendors and other businesses that can provide services to you. Businesses tend to like helping other businesses when they can. They know what it is like trying to survive, so stay on their good side and you can all help each other.
3. Open a Business Credit Card
You should really consider this. As long as you use it properly, this is a great way to build up credit for your business. Not only can they help you build up good credit, but they can help give you flexibility in your spending because you have a line of credit at your disposal. Keep in mind, it is important that you use it wisely and do not overextend yourself.
What Are The Benefits To Incorporating My Business?
In this business credit guide, I am going to suggest that you seriously consider incorporating your business. When you incorporate, you are legally separating the profit of your business and your personal profit. This also allows you to separate tax liability and credit risk. If something negatively impacts your business credit, it does not cause a decline in your personal credit, if you are incorporated. When you do this, you also must clearly separate expenses for the business and your personal expenses.
What Is A FICO Score?
You probably have heard the term FICO score, but do you really understand what it means? This business credit guide is going to explain it all to you. It is one of the two major types of credit scores in the US. It has been around since the 1950s. It was created to give borrowers and lenders a more fair way of making a decision about credit.
Prior to FICO, a lender would just decide based on whatever reasons he wanted whom he would lend money. The FICO scored prevented that type of favoritism. As long as your FICO score is in a good range, this works out for you.
FICO stands for the Fair Issac Corporation and laws were changed to make this they way credit determinations were made. This is an unbiased way to make determinations in lending. Your credit score does not know gender, race, or creed. It just knows how you have used your credit in the past. There are, however, five criteria that go into determining your FICO score.
1.Your Payment History
When you pay your bills late, or not in the full amount, your credit score drops. When you have a history of paying your bills on time and in the proper amount, your credit score may go up. Paying on time is a bit tricky because not all bills are reported when paid on time. Your mobile phone bill and your utilities are not reported when you make timely payments, but do not make a payment on time and see what happens.
2. Credit Utilization
I will explain credit utilization in more detail later in this article, but this is the amount of credit that you are using of the available credit you have. In this case, think of a credit card. You have an available credit limit of $2,000, but you only have a balance of $200. You are only utilizing 10 percent of your credit.
3. The Length of Your Credit History
If you are young and do not have a lot of credit history, that tends to lower your credit score. It is important that you show good use of credit and have never used any credit is not a good use of credit.
4. Your Mixture of Credit
Lenders like to see that you have a variety of credit usage. They want to see that you have credit cards and personal loans and possibly a car in the mix. This shows that you are able to balance a good ix of credit and use it properly.
5. New Credit That You Have or Attempted to Obtain
When you open a bunch of new lines of credit all at once, lenders tend to worry. They wonder why you want all that credit and what you plan to do with it. If you opened a loan a year ago and have been paying it off or paid it in full, they like to see that. However, if you have opened up several credit card accounts all at once, that is not good for your credit score.
How Does Credit Score Impact Credit?
One might argue that your credit score IS your credit. That is a large amount of truth to that, but this is why understanding your credit score is important for everyone, so you have a true grasp on your credit score. I cannot give you a good business credit guide if I do not explain the details of your credit score.
Credit Score vs. Credit Report
Credit Report Basics Explained
Your credit score appears on your credit report. They are not the same thing. Your credit report basically shows your entire credit journey. It lists all the payments you have made, including all the credit that you have borrowed. Most importantly, it shows any late payments you have made. It shows if you have defaulted on any loans, or if you have filed bankruptcy.
Your credit score is a three digit number that appears on your credit report with all that other information. Your credit score is prominently displayed on your credit report. This number is an indicator to lenders of how risky it is to loan you money. The lower your credit score is then the higher risk you pose.
7 Steps to Improve Your Credit Score to 700+
There is a credit score scale of which you should be aware. A typical credit score is in the range of 350 to 850. Most people have a credit score that falls between 600 to 750. If you have good credit, it falls between 670 to 800. You should be aware that anything below 570 is in danger of bad credit. When you have bad credit, it is much harder to get credit for your business or personally. You may find it is difficult to be approved for a loan. .
How Do I Maintain A Solid Credit Score?
One of the key ways to maintain a solid credit score is to pay your bills on time. You must pay whatever amount is due and pay them on time.
Pay Bills on Time
This helps you more than you realize to maintain solid credit. In this business credit guide, you should learn that one of the largest impacts to your credit score is late payments.
The downside is while just about every company that gives you a bill reports late payments to the credit bureaus, not all companies report timely payments. Mobile phone and utility bills are not reported regularly for on-time payment. However, watch what happens as soon as you are late. Different companies have different criteria for late. There are some companies that if you have missed your payment date by 5 days, you are late. Others give you up to 30 days and some will give you up to 90 days. It just depends on the business and/or lender. You should find out these details before you sign any type of contract.
Do Not Max Your Credit Cards
If you have credit cards, do not max them to the limit. It is good for your credit to use them, however, when you use more than 30 percent of your overall credit limit, you are in danger of negatively impacting your credit. You could also overextend yourself when you get into this position and not be able to make regular payments. You may only be able to pay your minimum balance and you will never get out of debt.
While we are talking about credit cards, if you are considering opening one, put in your information in this form below, and we'll work on getting you offers from lenders:
What Can I Do About What Is On My Credit Report?
If you see that there are errors on your credit score, you should take steps to correct them. Let me stop here for a second. I want to reiterate something...I said errors on your credit report. You can only correct items that are wrong or you did not open. If your credit report shows that you made several late payments on your car loan and that is correct, there is nothing you can do to fix that. You can only correct the items that are wrong.
In this business credit guide, we want you to focus on what you can correct. You may have made some mistakes along the way with your credit and you have to learn from them. However, when it comes to making mistakes with your credit, they tend to follow you around for a while.
When you see a legitimate error on your credit report, you should contact the reporting agency right away and dispute it. You will have to provide documentation to support your claim that it is an error. You should work with the reporting agency to determine exactly what they need for documentation. You will do yourself more good by cooperating with these agencies instead of getting angry with them. Keep that in mind when they require a lot of documentation.
Another way to maintain a solid credit score is to be smart with your credit utilization. Remember that credit utilization represents 30 percent of your FICO credit score. Credit utilization is the amount of debt you have versus the amount of credit available to you. Since this is a business credit guide, I am speaking in reference to business credit, however, the same is true for personal credit.
To explain it in another way, if your credit utilization is high that means the outstanding balance on your credit card or line of credit is high compared to the amount of available credit you have. Lenders do not like to see you have a high ratio of credit utilization, because they feel you are at greater risk to not pay your bills. They think when you have a large amount of money to repay, you may not have the funds available to repay and therefore will not pay some or all of your bills.
Example of Credit Utilization
I like giving examples, so I am going to show you the same thing I said above, just with numbers. Please keep in mind, this is for explanation purposes only, these are not real numbers.
You have a credit card with a maximum limit of $6,000 on it, and the balance on your card is $5,200, which is going to negatively impact your credit score because you are using more than 30 percent of your credit line. You are pretty close to max out on your credit card.
If you have the same $6,000 limit and a current balance of $1,000, which you pay regularly, you have great utilization. You are utilizing less than 30 percent of your credit line. In this example, 30 percent is $1,800.
Many financial experts advise you to keep your cards active and open, even if you pay them off and may not want to use them again. It gives you the credit you are not utilizing and so you have a better credit score.
Should I Monitor My Credit?
Monitoring your credit is always a great idea. Not only for this business credit guide but in your personal life, too. You should pull your credit report once a year and take a good look at it. You should look for anything that appears to be an error. You should also look to see if there are any accounts on your report that you did not open. If you see either of these items listed, you should take immediate steps to correct them.
It could mean that someone has stolen your information and is using it. It could also just mean that there are errors. Either way, you should have them corrected immediately. When you pull your credit report, it also gives you a chance to see your credit score.
Can A Budget Help My Business Credit?
Absolutely, a budget can help you and is a must for your business. I know this is a business credit guide, but I would be remiss if I did not mention creating a budget for your business. Honestly, a budget is a smart part of a business credit guide. A budget gives you an understanding of how much you have in income and how much you spend on expenses.
Hopefully, you have more income than you have expenses. If you are a brand new business just starting out, you may not have any income at all. You may not have any for a while. It is extremely important to understand how much money you can spend so you are spending it in the right places for your business. You are not able to do that until you create a budget for your business. You should be honest when you determine where you need to spend money. In the early days of your business, you should spend wisely.
Conclusion
I put a lot of information in this small but mighty business credit guide. You should understand all of it and learn even more than what is in here. The best thing this business credit guide can teach you is be smart with your spending and protect your credit at all costs. You should also consider separating your personal and business expenses so that one does not impact the other. Always make sure you can afford to repay any money that you borrow.