If you’ve used a personal credit card you’ve already started establishing personal credit. It’s a great tool for getting extra purchasing power for the things you need. However, personal credit alone can only take your business so far.
As a small business owner, it’s important to understand and distinguish between personal and business credit. Too often, Beacon Funding sees business owners rely solely on personal credit to finance equipment. Very few small businesses can grow and expand their operations consistently over time without obtaining some form of financing. Establishing business credit is key if your business hopes to tap into the many financing options available to them.
Let’s take a look at how establishing business credit can set your business up for long-term success.
What is Business Credit?
Like personal credit, lenders want to see how reliable a business pays their financial obligations before giving them a loan. Lenders typically look at business credit to determine if a company is worthy of lending money. The better the business credit, the less risk for the lender, and the more likely a business can obtain financing.
Typically, a business’s credit is evaluated by reviewing a variety of factors. Here are some components that make up what lenders typically look for:
- Time in Business: Time in business is a measure of how long a company has been operating. It is important because it’s a useful measure of how successful a business has been. All else equal, lenders prefer to work with businesses that have demonstrated a long history of success. If a company has operated successfully for 20 years, it is logical for a lender to assume they will be successful for five more years while their loan is being repaid.
- Corporate Pay History: Corporate pay history is a measure of how well a business has repaid past obligations. It is important because typically businesses that have paid timely in the past will continue to pay timely in the future. All else equal, lenders prefer to work with businesses that have a long, successful history of repaying their loans on time.
- Lack of Derogatory History: Historical derogatory events such as corporate liens, judgement, suites, collection and bankruptcies make lenders nervous. Most lenders assess more risk to a business that has had financial problems in the past. If there are problems, lenders may fear that these issues may persist during the repayment of their loan that may put their debt at risk. All else equal, lenders prefer to work with businesses that do not have a derogatory-free past.
- Ownership Credit: The personal credit quality of a business’s owner(s) often plays into the strength of business credit. Many lenders assess more risk to a business whose owner(s) fail to manage their personal credit well. Lenders often assume that poor personal credit will lead to poor repayment of their business loan. All else equal, a lender would prefer to work with a business in which the owner(s) demonstrate strong credit trustworthiness.
- Positive Cash Flow: Cash flow is the net amount of cash moving in and out of a business. Businesses that have significantly more cash coming into their business than out tend to be viewed as a better credit risk by commercial lenders. Businesses with more bank deposits and balances are considered more capable of making their monthly loan/lease payments on time. All else equal, lenders typically prefer to work with businesses that maintain higher available balances in the bank account.
Businesses can’t expect to scale without access to bank loans or outside financing. Establishing strong business credit builds your business credibility and is an essential part of business expansion.
Benefits of building business credit
Some small business owners probably don’t see the benefits of building their business credit until it’s too late. According to the National Small Business Administration, nearly 27% of businesses claimed they couldn’t receive the funding they needed and prevented them from growing. But funding and growth aren’t the only benefits of starting business credit early. Some others include:
- Shifting the risk and liability off you personally. By establishing business credit, a business owner can free up their personal credit to benefit themselves and their families.
- Enhancing the liquidity of your business. By establishing credit, a business may be able to borrow more, allowing them to keep more cash in their bank account to better run their operation on a day-to-day basis.
As your business builds credit over time, its reputation with lenders becomes stronger and more secure. This puts your company in a better position to acquire the assets they need to grow and expand profitably. If your company needs different pieces of equipment for different jobs, strong credit gives you the ability to get the right kind of equipment while keeping your personal credit separated from business expenses.
Overall, establishing your business credit adds more purchasing power to your business. Plus, you’ll have the peace of mind knowing your personal credit is protected.
How do you establish business credit?
One way to start establishing business credit is to work with a lender that reports to others how you repay your business loans. In essence, your loan can work as a reference to future lenders that you do, or do not, repay your obligations on time.
Your business’s recent pay history carries more weight than past pay history. Therefore, in the event your business hits a rough patch and becomes delinquent on its payment obligations, you can work to rebuild your business credit by reestablishing a timely payment practice and keep those on-time payments from going for an extended period.
New businesses should ask potential lenders how they plan to report their pay performance. If a lender does not share your pay history with others, talk to other lenders who do. That makes sure your business can start to build a public record of trustworthiness and make it easier for you to obtain competitive business financing going forward.
Why is business credit important?
If you want to grow your small business and acquire equipment in the future, business credit is vital for securing financing. The fact is, small businesses can’t expect to always purchase their equipment with cash. The sooner you start establishing business credit the better. Here’s why:
- As your small business scales, you’re going to need access to more funds and better cost control.
- As your small business takes on more work, getting reliable customers, and bigger orders, you’re going to need funds to purchase equipment.
When you acquire equipment, the cost of financing is directly correlated to the strength of your business credit. The best way to acquire competitive financing is to start establishing business credit with a lender that’s the right fit for you.
By building the proper business credit, it allows your small business to maintain liquidity for a rainy day. This is where having exceptional business credit is essential in letting a lender’s money work for you.
Start Building Your Business Credit With Beacon Funding Today
Everyone has to start somewhere. As a young business looking to establish credit, you need an equipment lender that has your goals in mind. Unlike traditional lenders, Beacon Funding is comfortable helping startup companies build their business credit – we have your long-term goals in mind.
For over 30+ years, Beacon Funding has helped small businesses grow and expand. If you’re interested in establishing or expanding your business credit history, contact us today and we’ll help you.