How Does Credit Work for Small Businesses?

You’ve likely spent a good portion of your adult life learning about and protecting your personal credit score. But what happens if you run a small business? As it turns out, your business itself will have its own credit — and you’ll be responsible for that, too.

Here’s what to know about business credit and how to get and build it over time.

What is business credit?

Business credit tells the story of your company’s payment history and responsibility. If you pay your debts regularly and on time, your credit will be good; if you borrow more than you can repay or make other financial missteps, your credit may be lower.

Business credit is based on elements such as:

• Payment history.
• Length of credit history.
• Business size.
• Industry risk.

Of course, different credit agencies weigh and measure these factors in various ways. That means your score may shift depending on which agency you use to review it.

Similar to personal credit, business credit often plays a significant role in determining what you qualify for, how much you pay and what your terms might look like. As such, it’s smart to start building this credit right away and protect it throughout the lifetime of your business. 

Keep in mind that company and personal scores are separate. They’re also based on different number systems; the former often ranges from 1 to 100, while the latter generally ranges from 300 to 850. Finally, while your own credit score is private, anyone can check your business’ score.

Tips for building and maintaining business credit

Because company and personal credit can differ, many small business owners aren’t sure where to start. Here are a few tips to put you on the right path:

 #1: Do Your Paperwork

Your business must be its own legal entity before it can have credit. This includes applying for an employer identification number (EIN), which is also important for filing taxes separately from your own return. The next step is to apply for credit in your company’s name (not your own).

 #2: Start Small

You may not have a good business credit score right away. After all, payment history and credit age both impact the overall score — and when you don’t have either of those things, it can be difficult to get started. 

 Fortunately, there are plenty of ways to develop your credit over time. For example, many retailers offer business credit cards that can only be used at that specific store or chain. Similarly, you can build history by paying for your company’s recurring services, including internet and phone bills. Just make sure you pay regularly and on time — or early if possible.

 #3: Separate Everything

As you research different cards and other ways of developing business credit, remember to keep everything separate from your personal accounts or credit score. Try to use cards that only report to business credit agencies to make things easier. 

 Do you have questions about building and maintaining business credit? Contact a Vectra Bank professional today.