Credit and business finances

As an individual, you probably understand what credit is and how it can be used or abused.However, as a business owner, you must start building a credit worthy reputation for your business.The first step needed when establishing credit in your business finances is to differentiate you from the business.The business needs to be defined as a separate entity that has its own credit profile.Your business needs to have structure in order.Small businesses are usually structured as a LLC and larger companies are usually structured as corporations.

Once you have your business structure in place, the next step to building your business credit is to make sure that you have a well-written business plan.A well-written business plan needs to include all the necessary financial details.These details should make it clear to lenders and investors that your company is a good investment.Much the same as a high credit score tells lenders that an individual has proven that he can manage money well and pay back debt, an articulate and researched business plan shows investors (individual capital investors and financial institutions alike) that putting their money into your business is a good idea because you can provide evidence for why your business is going to succeed.Essentially, your business plan is your opportunity to put on paper that your business is a viable and sustainable asset.

Obtaining a credit profile for your company is going to be different depending on the credit bureau and the individual lenders.You should know what the standards are for establishing and building a credit profile.By doing this type of credit assessment, you can know what will be required of you before you present your proposal.Once you have established a credit profile for yourself, you will need to continue to work towards maintaining and improving your credit worthiness.You do this by first using your own personal credit background to get your foot in the door, but then you will want to shift away from treating your personal finances and the finances of your business the same.To do this you can report your transactions to the three credit bureaus.This reporting ties back to your initial business plan where you outlined your sources of funding.When you report to the credit bureaus that you are making timely payments on those initial loans, you can show your current investors of your credit worthiness, and hopefully attract new investors by building a reputation.Maintaining a good credit standing with your angel investors (usually the first investors to trust you with their money) can attract other individuals who may also be willing to loan you money that you may need down the road.

Another means of getting your credit started is through loans from state or national business associations, such as the Small Business Administration (SBA).Paying back such loans on time can also help you establish your business credit profile. Building or improving your business credit profile is not unlike improving your own personal credit rating.You will need to pay within the set terms of suppliers, make sure to work with suppliers who are reporting your prompt payments, try to limit the number of inquiries into your credit profile, use a "less is more" attitude when it comes to credit cards, do not let licenses or registrations lapse, and maintain thorough, up-to-date financial records.

When thinking of the status of your business's credit, you will also want to look at other businesses in your industry to see how yours compares.You may think that your credit standing is good, but if most other businesses in your industry have better ratings than you do, there may be more room for improvement.Lenders will certainly want to know why others in your same field are able to spend less or why you need to borrow more.