How Entrepreneurs Can Build Their Credit and Why It's Important
As an entrepreneur, your credit is one of the most important assets you have. Lenders look at your credit history and score to determine your eligibility, credit limit and interest rates. Angel investors also look at your credit report to determine whether your finances are in good shape, which means that even businesses that don't apply for traditional loans must have a solid credit history.
Make 2017 the year you get aim to get your finances on track and improve your credit - doing so will only increase the financing options available to your business. From startup supplies to general operating expenses, the way you use credit to run your business can make or break your future financial security.
Use SMART Credit
The SMART acronym is a goal-building framework that serves to assist entrepreneurs and small businesses. Each letter stands for a step on the road that will get you closer to better credit.
The "S" in SMART stands for being specific. This means setting concrete goals for your business, such as "I will cut costs by 5 percent this quarter," rather than "I want to cut costs in general."
"M" stands for measurable, meaning that you should set goals you can measure through specific metrics.
"A" stands for achievable. Achievable goals propel your business forward and are well within your ability to complete in a reasonable timeframe.
The "R" in SMART stands for realistic, which means setting smaller goals that you can realistically accomplish rather than lofty goals with a low chance of success. Whether a realistic goal for your small business is fulfilling 100 orders or 1,000, setting realistic goals keeps you from becoming discouraged.
Finally, the "T" in SMART stands for time-bound, which means accomplishing tasks by a certain date rather than operating without a set schedule.
Check Your Credit Report
False information on credit reports is a common occurrence for entrepreneurs and business owners. Regularly checking your credit report will not only help you stay apprised of your current creditworthiness and keep track of your debt, but give you the opportunity to challenge false information on your report immediately. Businesses are commonly mistaken for other businesses with similar names, so the last thing you want is for another business' credit mistakes to result in your company being denied a line of credit or suffering a hit on your credit score.
Establishing lines of credit with your vendors can help build your credit history as a business. This strategy also allows you to spread out payments for the services and goods you need to operate. Vendor credit lines are essential for all businesses, but especially for startups that do not necessarily have the capital or creditworthiness to purchase everything they need to get off the ground.
Paying on Time
Paying your bills on time is the best way to build your creditworthiness. Vendors look almost exclusively at your payment history when deciding whether to work with your business and offer a line of credit for goods and services. The terms of payment for business credit lines are often different from personal accounts. For example, while many credit card companies will wait for a full 30 days before reporting a late payment to the major credit bureaus, your business credit lines may report late payments much sooner. A single late payment could cause significant damage to your business credit history.
Opening business credit cards and bank accounts is essential when it comes to keeping your personal finances separate from your business finances. If you pay for business expenses through your personal accounts, it may be difficult to claim those expenses at tax time. If you are ever audited by the IRS, having clearly separate accounts will make the process easier. Separate accounts also help protect your personal assets in the event that your business files for bankruptcy or goes through other financial difficulties.
By following these manageable yet effective steps, you can build your business' creditworthiness. A solid credit history not only reflects well on your brand but helps your business obtain lower interest rates and more diverse opportunities for funding as well. Maintaining a high score over time takes effort, but with these smart strategies, you can dramatically boost your chances of success.
Maricel Tabalba is a freelance contributor for Credit.com who is interested in writing about personal finance advice for Millennials and college students. She earned her Bachelor of Arts in English with a minor in Communication from the University of Illinois at Chicago.