No doubt you’ve heard the expression, “money makes the world go round.” This is certainly true for small businesses. Managing your money well is critical for success. You can use small business loans to help do that. But that’s just one tool. As a small business owner, you need to understand the ins and outs of business credit.
There is a lot of information out there about business credit. And you’ll plenty of well-meaning individuals willing to advise you. The problem is, all too often these “facts” and opinions are based on myths. They are not true.
BUSINESS CREDIT MYTHS ARE DANGEROUS
Believing credit myths sends you in wrong directions. It keeps you from growing your business. So the more you know about business credit facts, the better you can manage your money.
COMMON MYTHS VS. THE REAL TRUTH
MYTH 1: IT’S OK TO RELY ON PERSONAL CREDIT FOR YOUR BUSINESS
What’s the difference? You might ask. After all, it’s your business, right? Yes, but your business has to stand on its own two feet. So to speak. It’s not unusual for small business owners to invest in their own business. Actually potential lenders like to see that you have some skin in the game, too. But there are two important reasons to separate personal and business credit:
- If your personal credit is all tied up with business debt, you’ll won’t qualify for a personal loan when you need one. Your credit cards won’t be there for you if you need them personally. Worst, if your business cannot pay, you are personally responsible for all that debt.
- Your business cannot grow without its own credit profile. Lenders and suppliers want to see good history of bill paying. And responsible use of credit cards and your line of credit. Did you know that even potential customers can check your business credit score? It is imperative to establish and maintain good business credit.
MYTH 2: CHECKING YOUR CREDIT CAN LOWER YOUR CREDIT SCORE
This is not quite true. As a business owner, you can check your business credit report any time without affecting your credit score. That’s good news, because you should check your business credit at least once a year. You want to be sure your history is accurate. Detect mistakes so you can fix them. Don’t let this myth keep you from monitoring your credit history.
Be aware, though, that your credit status can be affected when lenders request a credit report. That happens when you apply for small business loans. Or a business credit card. Too many requests may seem like “red flags.
MYTH 3: IF YOU PAY YOUR BILLS ON TIME, YOU’LL HAVE GREAT BUSINESS CREDIT
Obviously, on-time payment is a good thing. Along with other factors, a good payment history helps build a strong credit score. But only if your creditors report your payments to one or more business credit reporting bureaus. Companies like Dun & Bradstreet, or Experian. These agencies need information to create your credit score.
Don’t assume your suppliers and others are reporting your payments, because they don’t have to do that. Request that they do so. Or do business with vendors who will help you this way.
MYTH 4: REDUCING YOUR CREDIT LIMITS CAN BOOST YOUR BUSINESS CREDIT SCORE
Strange as it may sound, this is bad advice. Here’s why. One key factor that determines your credit score is your debt-to-available-credit ratio. Available credit is the total of all the credit limits on your business line of credit and business credit cards. Debt is how much of that credit you have used. Lenders like to see you have lots of credit available. But that you are responsible, using it sparingly. Reducing your credit limits lowers your “available credit” number, making your debt-to-credit ratio look worse.
BUILD UP YOUR CREDIT SCORE
Sageworks says, “Managing business credit is one of the most important and challenging acts for small business owners. From using personal credit cards for business, to missing out on opportunities in small business tax credit, there are several ways to get entangled which can harm your business’s creditworthiness.”
No need to become entangled. Get the facts. Learn what your business credit score is all about, so you can put it to work, positively. For example, Experian calculates your score using an algorithm that determines risk based on:
- Credit – the number of “trade experiences,” outstanding balances outstanding, payment history, and credit usage
- Public Records – if there are any liens, judgments, or bankruptcies in your business past
- Demographics – business size, industry, and length of business credit history
These factors tell lenders if your business is financially stable. And reliable. That makes you less risky.
When shopping for small business loans, do your homework first. Don’t just start applying for business loans. Every time you do, the potential lender will run a credit check on your business. Too many credit checks in a short period can hurt your chances of landing a business loan. When lenders see all those credit requests they worry you are taking out multiple small business loans you cannot repay. Instead, research lenders first. Pick the one that’s best for you, then apply for your business loan.
Use credit cards wisely. It’s best to pay off balances before they accrue interest. If you can’t do that, pay balances down as quickly as possible. Do that by paying more than the minimum – as much as you can – each month. This keeps payments current and protects your debt-to-credit ratio.
Money is a tool. It is the cash that flows into your business from sales. It is the extra working capital you gain from small business loans. It’s the one thing that allows your business to operate from day to day. That keeps you competitive. And allows you to expand to meet growing demand.
There’s pride in that, and peace of mind, too.