Thursday, December 10, 2015

Top 5 Reasons You Need Good Business Credit

Most of us know that good personal credit makes it easier to purchase a home, get a job, or rent an apartment. But did you know that as a business owner, you’ve got a whole other set of credit reports and scores to worry about?

These other reports, based on your business, get generated pretty much the same way personal credit reports do. The main business credit report bureaus are Experian, Dun & Bradstreet, and Equifax, and business lenders and commercial partners all look at these reports to judge your business. And what they find will impact your ability to get financing and Net-30 or Net-60 payment terms for the goods and services your business uses.

That’s why, if you own or are about to open a small business, it’s in your best interest to build strong business credit as soon as possible.

So, how exactly does having good credit help business owners? Here are the top five ways:

1. Secure Loans from Top Lenders

Once you start searching for business financing, you’ll notice that the options seem endless. Over 44 different types of financing options are floating around, and more than 100 online lenders entered the market in past two years!

As you research, you’ll likely find some offers that are a better fit for your business, while others don’t mesh well, are too confusing, or overly expensive.

Lenders like funding business owners with good credit—so having an excellent business credit score will give you the power to decide who to work with.

According to Nav’s small business owner survey, business owners who understand their business credit scores are 41% more likely to get approved for a bank loan.

On the other hand, a low credit score can be an inconvenient road block, limiting your lending options and sometimes eliminating them completely. Instead of being able to choose the best lender for you, you may be forced to select from a narrow pool.

2. Access Larger Amounts of Capital

Finding a quality lender isn’t the only thing your business credit can impact, though. The  amount of money you qualify for depends on many factors, like the purpose for the loan, your existing collateral, and—you guessed it—that almighty business credit score. Lenders typically look at both your personal and business credit scores.

Business owners with poor credit will often be limited in the amount of money a lender will fund them. If you know you’ll need to take out a significant loan for your business, it’s in your best interest to begin building your credit as soon as possible.

Plus, you can typically access 10 to 100 times more financing when applying as a business versus as a consumer.

3. Get Better Interest Rates

Qualifying for any funding at all can feel like a victory, but not all loans are created equal. Before signing on the dotted line, you’ll want to make sure you’re doing so at the best possible interest rate available to you.

How do you get the best rates?  As you probably guessed, good credit is the key component—and that includes business credit.  Some loans, like those backed by the Small Business Administration, only charge a 6% APR, while some others can cost you 150% APR or more!

If you are applying to the SBA’s 7(a) loan program, the SBA will look at one of your business credit scores—your FICO SBSS score—to prequalify you for the loan. If your score is 140 or below, you won’t pass their prescreen process.

It’s pretty simple: The better your credit profile, the better your interest rate, and the more money you’ll save over time.

4. Tap into Trade Credit

Most business owners need to work with various suppliers and vendors to help their business run.  That’s where trade credit comes in.  Trade credit is the ability to buy now and pay later, which can help solve for cash flow headaches.

A good credit score will give you access to inventory, materials, equipment and services you might need without being required to pay for it all upfront. The better your business credit score, the more likely it is that your vendor will give you a longer repayment time.

For vendors and suppliers, good credit gives them confidence that you’ll pay them back in a timely manner.  For this type of credit, they’ll typically look at your Dun & Bradstreet Paydex score. Business owners with a poor score rarely enjoy the luxury of trade credit.

In addition to making it easier to access the items you need to operate your business, trade credit can help you build and maintain business credit. If the companies you work with report trade information to the credit companies, regularly paying them on-time or early will help improve your score.

5. Protect Your Personal Credit

If you have less than stellar business credit, you’ll likely need to use your personal credit to secure financing. While this might be a necessary means to an end during the early stages of your business, it’s never the ideal approach.

One of the first things any business owner should do is separate their personal and business finances and credit. Maxing out your personal credit cards to fund your business can kill your personal credit scores—and if the business fails, all you’re left with is lousy personal credit, making recovery difficult.

The moral of the story?  Good business credit is the lifeblood of most business owners. But even if you don’t currently have great business credit, there’s still hope! Just take simple steps at first, like checking your business credit reports, opening a business credit card, and paying all of your bills on time. After six months of “good behavior,” you should notice your business credit scores improve to a point that will help you get financing when you need it most.

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