Building business credit is crucial for companies aiming to secure external funding or purchase goods on credit in the future. Lenders, investors, potential partners, and others often evaluate a business’s credit scores and ratings to assess the risk of collaboration.
A weak or non-existent business credit profile can limit growth opportunities. Recognizing this, many small business owners work hard to establish a strong credit file. However, they sometimes make errors that undermine their efforts. To help you succeed, here are four common mistakes to avoid when building your company’s credit:
Applying for Personal Credit Cards Mislabelled as Business Cards
It’s easy to assume that a business credit card automatically boosts your business credit—after all, the name suggests so. Yet, in many cases, these cards are linked to the owner’s personal credit profile. This happens because most startups and new businesses lack an established credit history for issuers to evaluate when assessing repayment capability.
Understanding this distinction is critical, as timely payments and responsible financial habits often benefit the individual’s personal credit rather than building the company’s credit file.
Reviewing your credit card agreement carefully is essential to know the actual terms. While business credit cards can be a helpful way to access funds, they are typically not the most reliable method to establish business credit. This superior tradelines review connects you to the best tradeline companies to help you secure business credit without risking your personal credit.
Choosing an Inappropriate Business Structure
The structure of your business plays a crucial role in shaping its credibility and financial standing. Understanding the distinctions between business structures early on is essential to avoid unexpected challenges later.
Among small business owners, the sole proprietorship is a common and straightforward choice, treating the business and owner as one entity. While this simplicity can be appealing, it comes with significant limitations. The owner bears personal responsibility for any legal judgments against the business.
Most importantly, a sole proprietorship cannot build a separate business credit profile. This means lenders and partners will base their decisions solely on your personal credit history, which could affect your business opportunities if financial issues arise. Equally, any financial struggles within your business could negatively impact your personal credit score, creating risks that intertwine personal and professional finances.
No Changes to Outdated, Missing, or Incorrect Details
Failing to regularly update your business information with credit bureaus can create unnecessary complications when seeking funding. Outdated or incorrect details can impact your credit score, presenting your business as a higher risk than it truly is and limiting your opportunities for favorable lending terms.
Missing updates, such as increased sales figures or timely bill payments, can prevent potential lenders from seeing an accurate reflection of your company’s financial health. This incomplete picture may result in less competitive rates than your business deserves.
Make it a habit to review your business credit report frequently, just as you would with your personal credit, and ensure any necessary updates are submitted to the credit bureaus promptly.
Failing to Build Credit
While paying in cash might seem like a smart way to avoid interest on purchases, neglecting to build your business credit can be just as damaging as taking on too much debt. Limited credit history can result in low credit scores, which might lead to loan denials, unfavourable interest rates, or shorter repayment terms, all of which can strain your business’s cash flow.
To establish credit, consider starting with a small, manageable loan that’s easy to repay, setting a foundation for stronger financial flexibility. Loans often have lower interest rates compared to business credit cards, making them a practical way to build credit without excessively high costs.
Endnote
Neglecting your business credit score can lead to expensive consequences. By avoiding these common errors and taking a proactive approach to credit management, you can build a solid financial foundation and pave the way for sustained success.
Founder Dinis Guarda
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