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What Is Business Credit and Why Is It Important?

By Sabrina Loh

Just like your personal credit score, a business credit score provides financial institutions with a general idea of how trustworthy you are when it comes to borrowing money.

In other words, it reflects your business’s ability to handle its financial obligations and provides a summary of your business’s financial history.

For example, if your business is looking to apply for a cash flow loan, banks will look at your business credit to determine your business’s ability to repay the loan. If your business credit is good, you’ll have a stronger chance of getting a loan approved with lower interest rates.

You may also qualify for lower insurance premiums and lower interest rates on lines of credit when your business credit is good, giving you more options for financial assistance in the future.

What is business credit used for?

  • Eligibility for loans

  • Lower interest rates

  • Business insurance premiums

  • The credit limit you receive from vendors and suppliers

  • Raising money from investors

How is business credit calculated?

Much like your personal credit score, the most important factor that makes up your business credit is your payment history — whether you make on-time payments in full on your debts.

Business credit also takes into account the age of your business, debt and debt usage, the size of the company, and the type of industry you’re in.

4 Tips to build good business credit:

Having good business credit is incredibly beneficial, such as lower interest rates and higher chances of getting loans approved.

Building a good business credit score for your business works similarly to building your own personal credit.

1. Separate your business and personal finances

In order to build business credit, you’ll have to separate your business finances from your own personal finances. Otherwise, the credit that you build will be credited to your personal credit profile, and not your business credit profile.

This is extremely important because business loans are granted to the business itself, not to the business owner.

This might happen if you’re using a personal credit card for business expenses, so you should open a business bank account to conduct all business transactions.

However, having a good personal credit score is also important, especially for small businesses with a shorter history, as banks may check on the owner’s credit score first before offering a business loan.

2. Apply for a business credit card

A business credit card is one of the easiest ways to build your business credit. It works just like a personal credit card, where you must pay off your credit card bill each month to build good credit.

Business credit cards may also offer benefits and rewards that can be helpful to business owners.

But remember that late payments will damage your business credit score and don’t max out your business credit card.

3. Pay vendors early

You can build your business’s credit by purchasing products and services using vendor credit, where the purchases are made by financing the costs. These vendors report your payment history to credit bureaus, so if you pay vendors early, you’ll get a higher score.

4. Never miss a payment

Your payment history is the single most important factor in building business credit. Whether it’s a business loan, business credit card, or vendors, prioritise paying all your expenses early or on time!

The Bottom Line

Just like your personal credit score, business credit takes time to build and provides powerful insights to creditors and investors on how responsible a business is with its finances.

It’s important to start building your business credit early so your business has more flexibility and options for financial assistance in the future, which is essential for a company’s growth.

Stay on top of it by building solid financial habits, such as by creating a business budget and forming strategic partnerships!

Tune into the BigPay blog every week to learn more tips like this.

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