A strong credit score can make all the difference on whether your business qualifies for financing. But while business owners typically understand how to manage personal credit, they may not realize they can also build business credit under a separate report. Not only does this make it easier to borrow money and at better terms, it can also protect your personal finances. Here’s how.
What Is a Business Credit Score?
A credit score is a three-digit number that represents how safe or risky someone is to borrow money, based on their past behavior. Someone with a high score has paid their bills on-time whereas someone with a lower score may have maxed out their credit cards or missed payment deadlines. If you need help remembering deadlines, check out how to put banking and credit card alerts to work.
You develop a personal credit score based on loans in your private life like your mortgage, student loans, car loans and credit cards. But if you own a business, you can also build credit under its separate tax ID number, called an Employer Identification Number (EIN). If you don’t already have one, you can apply for an EIN with the IRS.
Then when you apply for a loan or credit card, you can request to borrow under your EIN instead of your Social Security Number. This will create a new business credit report prepared by the rating agencies Dun & Bradstreet, Experian and Equifax.
Financial Benefits of a Business Credit Score
When you apply for a loan, the lender could ask if you have a business credit score. While you may qualify without one, having an impressive business credit report will help your chances.
A stronger application can also lead to lower loan interest rate. Since business loans can be for such a large amount of money, even a slightly lower rate could mean big savings. For example, if you’re looking to borrow $2,000,000 for your business, just a 0.5% reduction in the rate saves you $10,000 of interest per year.
Finally, a strong business credit score can help you negotiate better terms with your suppliers, like you have 30 days to pay for equipment and inventory rather than paying 100 percent on delivery. Once again, these trades terms are more common for businesses with established credit.
Protecting Your Personal Credit
When you build small business credit, you also protect your personal finances. Part of your personal score is based on how close you are to maxing out your credit cards each month.
If you’re running business expenses through a personal card, you could get close to maxing out each month which can hurt your personal credit score. This would make it more difficult to qualify for mortgages, car loans and other types of loans in your personal life. Setting up business cards or a line of credit keeps things separate.
Another benefit is that once your business credit history is strong enough, lenders may be willing to set up future loans completely under your business name, so you don’t have to secure the loan personally. This means that in the worst-case scenario when you can’t pay off the debt, the lender could only go after your business assets for repayment. Not your personal savings or belongings.
Building Your Business Credit Score
Chances are, you will not be able to take out a standalone bank loan for your business without an established credit history but there are other easy ways to build up your score. One option is to take out a business credit card under your EIN and pay off the balance each month. Every on-time payment adds points to your score.
You could also take out a short-term cash flow loan from an alternative lender. These loans are easier to qualify for since these lenders make decisions based more on your past business revenues and less on your credit history. You can use the loan to grow your business and develop business credit history at the same time.
One other option is to use equipment financing to buy a new asset for your business. These loans are secured by the equipment. Therefore, once again, your chances of qualifying are better, even without a high credit score. And making the loan payments will build small business credit.
Even if you don’t need to borrow money for your business now, consider using one of these strategies to start building up your business credit score anyway as it does take time. By taking action now, you’ll be in a strong position to borrow when your business does need money in the future.