What is Business Credit?
Business credit is to a business what personal credit is to an individual.
When we speak about business credit, we are referring to the power to obtain business credit cards, tradelines, SBA loans, business loans, and all other types of business financing.
That stated, much like personal credit, business credit has something similar to a social security number issued by the IRS, but it is called an Employer Identification Number. It is better known as an EIN.
That nine-digit EIN has an assortment of purposes.
First and foremost, you need it to file business taxes with it. After that, the EIN has several benefits.
- Allows You To Establish Business Credit
- Allows You To Open Business Banking Accounts
- Helps You Build Trust With Vendors
- Speeds Up Business Loan Applications
- Allows Your Business To Apply For Business Credit Cards
- Separates Your Personal Finances From Your Business
There are other benefits, but the focus of our attention will be defining what business credit is and why you need it.
Can You Imagine Life Without Personal Credit?
Think about it; the average person would not be able to buy a house, a car, or a boat, or pay college tuition. And that’s the short list of reasons why people use personal credit.
Business credit provides the same latitude. Without it, many businesses would not be able to stay in business, let alone expand.
Let's Run Your Business Credit Check
Business credit is essentially a track record of a business’s financial accountability or lack thereof. Credit card companies, investors, and financial organizations that extend credit use your business credit profile to determine whether your business is a good candidate as a borrower.
Several agencies assess business credit. Each agency has a unique method by which they calculate Business Credit Worthiness. The rule of thumb is – the higher the number, the less of a risk a business becomes. See the chart below for agency and their credit scoring system.
- Dun & Bradstreet PAYDEX
- Equifax Business Delinquency Risk Score
- FICO® LiquidCredit® Small Business Scoring Service℠
- Intelliscore℠ Plus from Experian
As with your personal credit, some common factors can negatively impact your Business Credit Score:
- Late Payments
- Outstanding Balances
- Years On File
- Bankruptcies
- Liens
- Judgments
The caveat is, “Protect your Business Credit as if your business depended on it!” That means, pay your bills on time. Do not overextend your business credit. Lastly, monitor your business credit profile just as you would your personal credit profile.
Piercing The Corporate Veil
The term, “pierce the corporate veil” is used to define when a person is legally made liable to pay a business’ liabilities.
There are a few ways to pierce the corporate veil, but the only one we will focus on in this session is commingling your personal finances with your business finances. Simply put, do not do it, not under any circumstances!
Do not use your business checking account, credit cards, gas cards, loans, or credit lines to pay your personal bills. Conversely, do not use your personal checking account, savings, credit cards, etc., to make business purchases.
If your business is sued or goes belly up, your personal assets can be attached to satisfy your business’s debts.
The Benefits of Great Business Credit
A good business credit profile opens your business up to receive lines of credit, credit cards, gas cards, business loans, tradelines, and store credit.
Additionally, banks, crowd funders, investors, credit card companies, and venture capitalists rely on your business credit file when deciding if they will do business with your business and to what level.
Your Business credit score also determines your insurance premiums, whether lines of credit are increased or decreased, and loan terms. Consequently, it would be best if you established Business Credit from the moment that you legally formulate your corporation.
