Business Credit: What it is And Why You Need it

Alliant Business Systems presented a webinar on ‘Business Credit: What it is And Why You Need it’ on Thursday, January 25th, from 4:00 – 5:00 p.m. (EST).

You know that banks use your personal credit to evaluate your trustworthiness before extending you a credit card, loan, or a mortgage. You probably also know that they’re using a credit report that distills your personal history to a three-digit number. But here’s a question for you: what do you know about business credit?

Alliant Business Systems helps business owners spot and correct issues with their business credit. Many of those issues could have been prevented had business owners better understood the differences between their personal and business credit. Let’s look at the basics of understanding and building business credit.



What is Business Credit?

Like personal credit, business credit gives you access to cash or a line of credit to either cover unexpected costs, or to capitalize on unexpected opportunities. It’s best built before you need it so it’s ready when the time comes. Waiting until you have a desperate need for credit to get the process started only increases the odds you’ll be turned down.

Four Similarities Between Business Credit and Personal Credit

Before we explore the differences between the two, let’s see what personal and business credit share in common.

  • Both are scored on a numeric scale
  • In either case, a lower number denotes a higher risk, and therefore worse credit
  • Whether you’re an individual or a business owner, you want your number as high as possible
  • If your number isn’t as high as it could be, there are ways to repair business credit or to fix your personal credit

Differences Between Business Credit and Personal Credit

While they share a lot in common, there are three very important differences between personal and business credit.

  • Business credit is not subject to the same consumer protections as personal credit
  • Banks will often extend credit in higher amounts to businesses than to individuals
  • Businesses can rely on lines of credit from vendors and other sources not available to the general public

Personal Credit vs Business Credit: Both Matter

It’s vital to keep your business and personal finances — and therefore, your and your business’s credit scores — separate. However, this can be easier said than done. Here’s why:

  • Your business doesn’t yet have a credit history, which puts the spotlight on personal credit
  • Your business may lack the assets — equipment, accounts, and real estate — that would be used to secure a loan
  • Your business may be set up as a sole proprietorship or a single-member LLC, which blurs the line between business and personal finances

Therefore, in the beginning stages of your business (or under certain business structures), it’s vital to preserve your personal credit as well as monitoring your business credit.

Common Mistakes Many Small Business Owners Make

We mentioned this earlier, but it bears repeating: business and personal credit must be kept separate. Just because your business offers a degree of legal protection under an LLC, for instance, does not mean you’re financially protected. Using personal lines of credit, a home equity loan, or a personal credit card leaves you financially liable for the business’s actions and financial condition regardless of any legal liability protection you may enjoy.

Understanding the Basics of Business Credit

There are a few simple steps to get your financial ducks in a row.

  • Get a copy of your business credit report from the three credit bureaus and review it
  • Know how your business credit score is calculated (including obligations, legal filings, credit usage, demographics, and public records)
  • Know the factors that lower credit scores, including a short business history, missed payments, high utilization, judgments, liens, collections, and late or long payment history
  • Understand the key metrics on your credit report, including tax liens, judgments, bankruptcies, collections, UCC filings, and bank, government, and leasing data, each of which are evaluated for different periods of time
  • Be prepared to contest inaccurate data on each of your credit reports, providing supporting documentation wherever possible

Is Business Credit Really that Important?

In a word, yes. What you don’t know can hurt you, and your business — especially when the day comes that you need financing. Better credit improves your credit capacity (the amount you can borrow) and the value of your company, but it also helps to protect your business credit. Each of these things means a stronger business and better peace of mind.

Whether you’re new in business and trying to start off on the right foot, or a business owner trying to right the ship, Alliant Business Systems has the help you need. Our seven-step business building program is a good start, but a call for a credit consultation is better still!