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In the world of credit and borrowing, there are two forms of credit one can have. The first being personal credit, which is linked to your Social Security Number or SSN, your financial history, and essentially is a profile built around you, for you. This number fluctuates based on a weighted combination of five different factors: payment history, credit utilization, length of credit history, accumulation of new credit, and credit mix. Business credit, the other form of credit, is linked to a business name that’s also tied to the firm’s EIN number. This, on the other hand, is credit a business owner can obtain which is not linked to their SSN or personal information. When done correctly, the SSN shouldn’t even be provided on the application—preventing borrowers from pulling your personal credit and possibly pursing your assets.
When a person applies for an auto loan, for instance, the lender pulls your personal credit scores by entering in your name, address and SSN. This information is sent over to the consumer credit reporting agencies, who in turn supply the requested report alongside all information related to that person back to the lender in question. With personal credit, an inquiry would then be put on your consumer credit report, which is ultimately used to make lending decisions. The obtained credit will then be reported back to the reporting agencies. When applying for a business loan, however, the lender pulls your business credit by using your name, business address and an EIN number. The information is exchanged between the lending institution and the business reporting agencies, which leaves an inquiry on your report and is also sent back to the business bureaus. Below, we explore the Top 12 Reasons Why Business Credit Is Essential For Any Business!
Business Credit Has No Direct Affiliation to Personal Credit
Business credit actually has no impact on the owner’s personal credit score or report. As mentioned earlier, it is highly advised not to provide your SSN when filing for a business credit application. This prevents lenders from checking your score. This also means that anyone, even those with poor or horrible credit, an be approved for business credit. Business credit is also separate from personal credit because it reports to business agencies—not personal credit reporting agencies. As business credit is used, it has no adverse impact on the owner’s consumer credit. This means utilizing your account even over 30% won’t negatively impact your personal scores.
It is also advised to not link your personal and business credit profiles as 10% of your consumer credit score is based on inquiries. This means if you’re going around using your personal credit to apply for business loans, your scores will plummet from all those hard inquiries. These also remain on your profile for years, affecting your future financial situation. Some unsecured business lenders won’t even lend to you if you have more than 2 inquiries on your personal credit report within 6 months. 30% of your total consumer credit is based on utilization, meaning racking up business credit cards from your personal profile will destroy your scores. The general rule with personal credit is to not use more than 30% of your credit limit on an account. This means even using the credit line for its intended purpose, business-wise, will ruin your score. In business credit…0% of your score is affected by utilization.
Business Credit Scoring
Business credit scoring is inherently based only on whether the business pays its bills on time. This means a business owner can obtain credit much faster using their business profile versus a personal profile. As a result, as long as you pay your bills on time and as agreed, you will have an excellent score. It also only takes 2-3 account reported for you to establish a score, and most vendors have your accounts updated to the reporting agencies within 30-90 days. This provides an easy and responsive system within which you can build an excellent business credit score and clean profile in a short period of time.
Anyone Can See Your Reports
As a business owner, put yourself in the lender’s shoes for a second. If you were to look at various businesses with varying degrees of credit quality, which would you pick? The one with a better score and clean payment history, or a business which has multiple credit lines which all have missed payments? The former, of course. As such, one key element to business credit is that anyone can view your reports and your scores, alongside much of your company’s information. This may seem like a huge negative, but consider the meaning behind the system.
With consumer credit, someone must have what’s known as permissible purpose to pull your credit—essentially, they need your consent. Also, only certain established institutions (such as auto dealers, mortgage brokers and so on) can lend money and are approved for credit pulling abilities. With business credit on the other hand, this information is fully public—meaning anyone who wants your information can easily and cheaply obtain it. Think about this: this means customers, clients, suppliers, potential business partners and competitors can access this information.
The information which they can view includes the amount of tradelines a business has, the company’s credit scores, high credit limits, past payment performance, employees, revenues and much more. Now go back to the initial question we discussed—would you want to do business with a company with outstanding credit or one with poor credit? Reflect on how potential customers and clients may perceive your business as a result of this. Good practices we advise include regularly monitoring your reports to see what others can see about you, and keep building your business credit so you can maintain a credible image for those who desire to view it. This should motivate you to have a stronger aptitude for financial responsibility and to ensure the success of your company!
Don’t Risk It All
If you provide your SSN on a business credit application, this is a form of a personal guarantee. This means you are personally liable for your business debts. So if you default on an obligation, the creditor will pursue your business assets first, then they’ll come for your home, your cars, your stocks and bonds, bank accounts and anything else you own. Sounds terrifying, right? This is why you should never provide your SSN on such an application.
Now, business owners don’t expect to fail—but 90% of them do, statistically. It would make no sense to put you and your family’s financial future at stake when you know there’s a 90% chance of failure. Often times, reasons for failure may not even be your fault. External circumstances out of your control can impact your company’s chances at success, so don’t risk it all. Most conventional banks make it hard to get a loan, so don’t use a personal guarantee unless you absolutely have to. You don’t even need to—so long as you build good business credit.
The Value of Business Credit When Selling Your Business
Anyone who has sold or bought a business will straightaway tell you how important business credit is. Think about it: if you have easy access to a company’s credit and financial information, as a buyer, wouldn’t you obtain it? You would probably want to buy the company based on what you see on the report—whether the business is established, pay their bills on time and have good revenues. Therefore, business credit is essential in getting a good evaluation of a business.
Business Credit Is Used For Lending Decisions
When a business owner applies for financing or credit, their business credit is reviewed. Not even having business credit established will absolutely get you declined for financing or loans. However, there is no Fair Credit Reporting Act in the business world as their is in the personal credit reporting world, which requires those who check your credit to notify you that they did, or that it was used in their lending decision. As such, your business credit is almost always reviewed—most owners just have no idea.
More Borrowing Ability
Another benefit of business credit is that it more than doubles your borrowing ability. You already have a consumer credit profile. Now, you have an entirely other profile you can use to invest. This means it’s the only way to obtain multiple store cards and cash credit cards, which means access to a lot more money. Did you know that per the SBA, credit limits are 10 to 100 times that of consumer limits? This means once you obtain business credit, it radically increase your available credit as well. An average Staples consumer credit card, for instance, may be around $3,000. In the business world, it would look more like $30,000. Businesses, after all, inherently have a need for higher limits, which they get. This is also why it’s hard to scale a business using just personal credit—it’s virtually impossible!
Building Business Credit Is Fast
Business credit can be secured very fast. You can get approved for initial vendor credit to help your company grow within one week. This credit will typically report within 30-90 days. Once reported, you will then have reported tradelines which give you an established credit profile and score. Once your profile is established in 90 days or less, you can start obtaining real usable revolving store credit cards. Within 120-180 days after that, you can get real cash credit cards such as Visa, MasterCard, Discover and AMEX cards to use anywhere.
Business Credit For Startups
Business credit is also perfect for startup companies. Most conventional and private lenders won’t lend to firms without financials and who have been open for 2 years or longer. The most popular cash flow type requires on year in business, along with steady revenue. Most consumer credit card approvals, on the other hand, are based off of personal income. With business credit, however, even a startup can get loads of new credit without these terms.
Business Credit With No Financials
Business credit is ideal for businesses who don’t have or don’t desire to show their financials. Let’s face it: we write off as many expenses in a business as we can. This leaves a smaller net profit, which is what most lenders and investors look at the most. Business credit, however, doesn’t link to financials or bank statements. A business with even zero cash flow could technically be approved for high limit cards, helping them to grow their cash flow. Tax returns are also not considered, so even if there is a loss the business can be approved.
Business Credit With No Collateral
Most business lending requires collateral. This is because, as mentioned earlier, 90% of companies fail, and so the risk of repayment of lent money is very high. This is why most lenders make it so difficult to get money—they aren’t designed for that kind of risk. This is also why SBA requires all business assets, even personal assets, to be used as collateral. Business credit is one of the only ways to obtain money without needing to provide collateral to offset the risk.
Competitive Advantage
As fruitful as business credit is, 90% of the general population knows nothing about business credit. Now that you do, however, you have a huge competitive advantage. It’s much easier to grow a business with access to credit. This leaves room to, say, test advertising easily and make some mistakes without losing everything. You can do this without putting your personal finances in jeopardy—by reaping the benefits business credit offers.
Now that we have covered many different benefits which business credit offers, it’s crucial to remember that every highly successful in the country has business credit. Most of these companies got to where they are today by using business credit to their advantage. That being said, business credit is absolutely not only for big companies! Any business can build business credit, including yours. It’s okay to not have business credit because you didn’t know about it…but take the right steps going forward to ensure you secure opportunity through business credit lines and loans. These steps must be taken to ensure success, and is so easy to obtain that it would be disastrous to not do it!
