The importance of business credit
When you initially start a small business you may be relying on your personal credit to get you the financing you need in the beginning. After some time, you need to start focusing on building your business credit. Why do you need business credit? Here are some things you need to know:
If you rely on your personal credit to obtain financing for your business, you will run the risk of lowering your personal credit rating. Your credit rating is extremely important to you personally as it can help you acquire home loans, car loans, credit cards, etc. If you use it for your business and you lose your business, you are still liable for the payments on the loan. It will hurt your personal credit if you cannot pay for the loan. It will also hurt your personal credit to use the money for the business because it shows a large debt to income ratio. Establishing business credit will protect your personal assets and you won't risk losing your home if the business fails.
Without business credit, you may be unable to acquire larger loans that are necessary for business expansion. Since lenders will take a look at your business credit to see how you have been able to pay your vendors on time and other things, they will scrutinize you if you don't have a large business credit report. This means you will not be able to acquire the money you need for business expansion and you can get stuck in a rut.
No personal guarantees
You need to establish business credit so you no longer need to give a personal guarantee on a loan. Lenders look to personal guarantees when you do not have business credit and they see your business as a high risk. Giving a personal guarantee on a loan means you are assuming fully responsibility for the loan and you will be 100% responsible for the company's debt as far as the repayment goes. This is dangerous as you probably do not have the money at hand if the business fails. The only pay to pay it is to sell your business and personal assets if the business is failing.
In order for people to recognize that you have a legitimate business, you need to establish the right business structure. Part of doing this falls on you to establish your business credit. Work with a CPA to figure out which type of business entity you need to declare so you can separate your business and personal finances from one another. It is always a wise decision to set up your business as a separate entity in order to establish credibility. A limited liability company or corporation is the best way to go as it protects you from any legal problems that may arise.If your company is sued, you can lose everything if you don't declare it as a LLC or something else that can protect your personal assets.
A great way to establish business credit is to set up a checking account. This is a great way to build your business credit. When your bank account starts to age, you will gain more credibility for your business. Setting up a business bank account is one of the easiest ways to create an identity and reputation for your business. Build a strong relationship with the bank as they will be able to help you acquire additional finding in the future. You can turn to them for credit cards, small business loans, and other things that are necessary to keep your business operational.