You’ve probably seen at least a few online articles about the countless business owners who misunderstand business credit. They give the impression that business credit is complicated. But when you look up the definition, it actually seems rather simple. For the most part, business credit is a reflection of your business’s ability to pay its bills. If you pay your bills within their allotted time frames, your business credit score will remain in good standing. You’re right; that does sound simple. So, what is it about business credit that is apparently confounding so many business owners?
Well, the confusion doesn’t exactly stem from the definition of business credit, or how a business credit report is compiled. Here are 5 things every small business owner needs to know about business credit:
1. Business expenses must be paid with a business credit/debit card
The amount of business owners who aren’t aware of the following information will absolutely shock you. It’s established that building business credit is synonymous with paying your business’s bills on time. But paying those bills will do nothing for your business credit if you pay them from a personal account. The bills must be paid from an account in your business’s name, or a business credit card. In fact, paying your bills with a personal credit card can seriously hurt your personal credit score and make it nearly impossible to obtain a sizable small business loan.
Since more and more people are becoming aware of the importance of business credit, credit card companies are reportedly making it easier for young businesses to obtain business credit cards. Eventually, it may no longer be acceptable to cover business expenses with a personal credit card in the business’s early stages.
2. It’s okay to ask for vendor credit
Credit card bills have to be paid by the same date every month, no matter what. Vendor bills are a different story. Since it’s pretty easy to obtain vendor credit, most businesses are permitted to take approximately two months to make payments. Very few businesses are able to pay immediately after an order is placed. A major factor for building business credit is negotiating advantageous payment terms with vendors/suppliers.
This refers to payment terms that, if adhered to, will benefit your business credit, your vendors, and of course, your business’s operational capacity. Depending on your industry, it may be more advantageous for you to eventually negotiate even longer terms, like 90 days. Businesses gain more negotiating power as they grow. And as long as you pay within that time frame, longer terms will not hurt your business credit.
3. Some vendors do not report your payments
You would think that any reputable vendor would report your timely payments to the three biggest bureaus (Dun & Bradstreet, Experian, and Equifax). Only sketchy vendors wouldn’t report your payments, right? Unfortunately, this is not the case. Before partnering up with a vendor, you must first make sure that vendor will report to all three bureaus. Sometimes, a potential vendor will not report to the bureaus unless a new business partner urges them to do so. If the vendor does not report, your timely payments will have no effect on your business credit profile. You will only be able to negotiate better terms with that individual vendor because that vendor is the only one that knows about your payment history.
4. Make sure your business lender reports payments as well
The same concept applies to business lenders. This may surprise you, but plenty of longtime business lenders do not report your loan payments to the three bureaus. These business lenders tend to offer cheaper, highly accessible loans. Certain circumstances may make it more advantageous to choose one such business lender but in most cases, you should choose a business lender that can help build business credit. Today, it is much more common for a small business to work with multiple business lenders. Many businesses take out loans with smaller business lenders so they can eventually qualify for a bank loan.
5. Small business loan > removing bad credit history
More and more business lenders are now open to working with borrowers who have less-than-perfect business credit. This is partially because paying back a small business loan is a more effective way to fix business credit than having something removed from your profile. Even if the latter is a realistic possibility, it will not make you seem any more reliable to potential business partners. Depending on the small business loan you choose, just a few months’ worth of timely payments could dramatically improve your business credit profile.
As stressful as it sounds, it’s often recommended to keep business credit in mind before moving forward with just about any initiative. How will this impact my business credit? Could I do this a different way to be more conducive to building business credit? Chances are, you’re going to need a small business loan at some point in the near future. As long as you continuously ask yourself these questions, it’s relatively safe to assume you’ll be approved.