Credit gives both individuals and businesses the opportunity to secure funding that is needed for desired items. However, many people assume that personal and business credit are one in the same when in reality they are very different. Let's take a look at some key differences between the two:
Business credit limits tend to be notably higher when compared to a personal line of credit
This is the unfortunate reality of personal credit – you have a much smaller economic footprint when compared to an established business. This is because a large amount of on-hand cash, or working capital, is typically required in order to facilitate operations as well as fulfill obligations. Similar to how personal debt obligations will appear on a regular credit report, a business entity's obligations will be attributed to an identical form of credit reporting when requested.
Consumer protection does not usually cover business loans
Consumer protection laws such as the Credit Card Act of 2009 have been put into place in order to protect individual consumers. However, such protections do not always apply to businesses. What does this mean? Your APR could change overnight or you could be charged late fees for the smallest offense. With that being said, look for a lender that extends consumer protections as a courtesy to businesses.
There are different forms of credit identification
As I’m sure you know, your SSN (social security number) is a unique nine-digit number issued by the government. All major credit agencies use SSN's to create personal credit accounts. Alternatively, an EIN (employer identification number) is the business equivalent of a SSN. Business credit history is subsequently linked to you by your EIN, or Tax ID Number, which is how the government recognizes your business for tax purposes.
How to build credit:
Monitor your payments
Good credit is the lifeline of your business, but bad credit will not stop you from securing a loan. Credit enables you as a business owner to expand physically, purchase new equipment, pay your awesome staff or purchase supplies using debt at a correlated rate. Make sure someone responsible is in charge of all accounts payable, because missed payments are the number one credit no-no!
Build relationships with vendors
Establishing relationships with your vendors can indeed help your credit. Vendors that you have built relationships with may agree to offer services without requiring you to pay in advance. The benefit to this relationship comes when you’re tight on cash and can't afford to pay for inventory or equipment up front, consequently forcing you to miss other payments.
Apply for business loans
One way to easily build business credit is to apply for a business loan. Start with a small loan amount so you can be sure that it will be paid in time. As you pay off the loan and build creditworthiness, it will eventually lead to a higher limit, increasing your business's overall spending power.
The Bottom Line
While personal credit differs from business credit fundamentally, they’re both very valuable aspects to your business. If you’re in this position and wondering how you can increase credit score, contact us for a complimentary consultation.