As a business owner, it is imperative that you understand all of the instruments and mechanisms of business credit. Your credit can lead to the opening or closing of many financial doors. It can allow your business to build credibility amongst other businesses as companies with excellent history profiles look more sincere and reliable. This is especially pertinent to small businesses or startup companies as it cannot only display credibility, but can be a way to gain investments and financing. However, it has come to my realization at AskTani that many people aren’t aware of an important component when applying for business loans: the difference between how your personal credit and business credit affects your application. You should realize a key element with personal credit is that they look at your personal financial background such as your car, home and how your payments reflect on your credit report.
Why is this important? If your business is less than 5 years old than they will look at your personal credit reports to see if you qualify for personal loans. If your business is over 3 years old, then they will look to see if you’re incorporated, if you have your LLC (Limited Liability Company), the EIN (Employer ID Number) of your business and your bank account. (You can become incorporated and acquire a LLC through your state and apply for your EIN through the IRS). Your bank account is pivotal in your business loan application process because this is the starting point of your business’ credit, meaning your bank account should be established immediately following the creation of your LLC or incorporation. Secondly, you must ensure that you are properly utilizing your bank account by consistently depositing money into it and leaving a portion of that money in there as well. Why? Because unlike with personal loans, your business’ cash flow is a key point of evaluation for eligibility of business loans is in addition to payment history. Furthermore, your business’ credit scores are mostly known as “Paydex” or “Intelliscore”; and unlike your personal credit score which ranges roughly from 100 to 800, your business credit score will range from 0 to 100, with 100 being the best. Credit scores that are at least 75 are considered favorable.
AskTani Tip #1: Before applying for a business loan, ensure you have established a physical business address. Although P.O. boxes are relatively cheaper, creditors prefer a physical address. You can even use your home address as your business address if your company is based from home.
You should also know that there is less protection against false information for your business credit unlike your personal credit. This is because many business credit agencies will not always explicitly say who is reporting the inaccurate information. What does this mean? You should always monitor the information on your business credit report to ensure accuracy.
AskTani Tip #2: You should be aware that if you as a business owner opt to apply for a business loan under your personal identity than you will be held responsible for any missed payments or debt. You should be careful in making payments or it can lead to a negative history on your personal credit report. Furthermore, when you mix your personal credit and business credit it can lead to confusion when attempting to keep track of expenses between your business and personal accounts.
As I mentioned before, your business credit starts as soon as you open your business bank account. It sets the foundation and a strong foundation will build a strong company. Through maintaining a solid credit history, it can allow for establishing a relationship with retailers, banks, etc. for future business loans and credit.
Applying for your first business loan can be challenging and you shouldn’t go through it alone. Subscribe to my AskTani YouTube channel to learn more tips and strategies to make your business strive to its fullest.