Tuesday, 30 March 2021

Many future entrepreneurs may not be aware of the fact that there are two types of credit—personal credit and business credit. 

Experts caution that they should not be used interchangeably, and establishing good habits for each can translate into future opportunities.

As you embark on your business endeavor, it's important to understand what business credit is, how to prepare your finances to access it and how business credit can contribute to the future growth of your company.

Understanding how to access business credit is especially important for entrepreneurs of color as they begin to establish their business concern. The Office of Advocacy at the U.S. Small Business Administration made several notable findings about minority entrepreneurs' access to capital in its 2018 report "Financing Patterns and Credit Market Experiences: A Comparison of Race and Ethnicity for U.S. Employer Firms." The report found that Black entrepreneurs were 17.6 percent more likely to use personal capital such as credit cards to fund their business ventures. In addition to that, Black and Hispanic entrepreneurs were also less likely to apply for credit because of fears their future requests for credit would be denied.

Personal credit vs. business credit

Most of us are familiar with the importance of building and maintaining a healthy credit score. We're advised to pay our bills on time, to understand concepts like credit utilization and interest rates, and we can typically name the big three credit bureaus that are most often accessed for our personal credit scores. It's important to note that business credit scores are associated with a business' Employer Identification Number (EIN) or Tax Identification Number(TIN).

Building and maintaining a solid credit score gives borrowers the ability to access mortgage lending in order to purchase a home, apply for a car loan or borrow for higher education. Put simply, healthy credit opens up opportunities to fund future personal goals.

Business credit functions in a similar way to personal credit. The distinction here is that business credit can be used to fund the purchase of inventory or large pieces of equipment, expand facilities, purchase vehicles or access more capital to pay staff wages.

Dunn and Bradstreet, Equifax Small Business® and Experian Business Credit™ are three credit bureaus used to monitor and generate business credit scores. In order to do so, these agencies will review behaviors, such as payment history, payment delinquencies and regular reporting of borrowing behavior. All three bureaus use the scoring range of zero to 100. Borrowers who have a business credit score that ranges between 80-100 are considered low-risk borrowers with the healthiest credit score.

Prepare your business credit from day one

One of the most important decisions a new business owner can make is defining how the business will be structured. Whether you choose to run your company as a sole proprietorship, an LLC or an S-Corp, you will need to request an EIN or TIN. If you're unsure of which avenue to pursue, consult a resource like the Small Business Administration, whose primary mission is to support and provide guidance to small business owners.

Next up, be intentional about separating your personal finances from your business expenses. Open up a dedicated checking account that will enable you to track your business expenses and earnings. It's also helpful to utilize accounting tools to help you monitor your income and expenses as they make their way in and out your accounts. Speak with your personal banker or accountant for additional guidance on how best to maintain your business finances.

Determine your credit activity

Spend some time examining your business finances to determine when and why you may need access to credit in the future. This type of clarity will help you as you grow your business. There will be times when you may need an infusion of cash to help offset costs. Having a healthy line of business credit can offer you funding options that you may not have otherwise.

Monitor your credit

Just like with your personal credit, it's important to develop a habit of monitoring your business credit accounts. You may also choose to subscribe to a business credit monitoring system, which can update your accounts once a month and alert you to any significant changes to your score.

Going into business can be an overwhelming process. There are so many aspects to running a healthy and thriving professional venture. Maintaining and establishing a healthy credit score from the beginning of your business journey may become the difference between your ability to grow and sustain your company in the future.


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