Building business credit is an important step for business owners since it paves the way to obtain financing when needed. If your business hasn’t established credit, you may not have the purchasing power needed to purchase inventory or grow your business. Entrepreneurs are often inexperienced when it comes to business decisions that might affect their finances. Here are the 5 biggest mistakes entrepreneurs make when building business credit.
It’s a big mistake for entrepreneurs to use their personal credit to build their businesses. This includes relying on your personal credit cards or taking personal loans in your name instead of the name of the business. When you establish business credit, you don’t have to worry about the impact it may have on your personal credit score or being personally liable if your business should fail. A better approach is to write checks from the business checking account and pay for business expenses using a business credit card.
When you establish a business, you should set up a separate business entity as a corporation or a limited liability company. If you operate as a sole proprietor, the earnings or losses of your business are reported on your personal tax return. If you have any issues with your personal credit, it can affect your business.
When your intent is to apply for a business credit card, make sure it’s not tied to your personal credit. Read the fine print when you’re applying for a business credit card. If it will report to your personal credit report, it’s not really a business credit card.
Trade credit is often easier to get than a business loan. You may think that doing business with a vendor who’s willing to extend credit to you will help to build your business credit, but it may not help if they don’t report to business credit bureaus. It’s important to work with vendors who report to the credit bureaus. It’s best to look for vendors who report to the credit bureaus monthly since there are some that report quarterly.
Entrepreneurs who are just getting started may make the mistake of not paying bills on time. It’s imperative to protect your business credit rating. Your business credit score is calculated on a combination of factors, and the most important one is your payment history. Missing payments on business loans or business credit cards can hurt your business credit.
Until you’ve established sufficient business credit, you may still need to rely on your personal credit to obtain business financing. You should periodically review your personal credit reports to make sure the information on them is accurate.
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