Credit is the primary method through which most businesses obtain the funds to get started and to continue to grow. Business owners are in a unique situation; having an opportunity to acquire both personal and business credit. Knowing the difference between the two is important if you want to maximize the value and creditworthiness of your business.
Many first time business owners will rely heavily on their personal credit in the beginning stages of starting their business. Some sole proprietors may choose to use personal credit cards and apply for lines of credit to pay for start-up expenses. These start-up and entrepreneurs may not realize the importance of building business credit, or the negative impact these actions can have on their own personal credit.
Using personal credit to obtain business funding can have a negative impact on your personal credit. A business owner will typically far exceed the number of credit inquiries and obligations that a regular consumer averages each year. These additional inquiries and credit obligations can have a negative impact on the personal credit score of the business owner.
Using personal credit also denies a business owner the opportunity to start building business credit. Business credit is very different from personal credit. Personal credit scores range from 300 to 850, with a score of 680 or higher considered an excellent rating. Business credit scores range from 0 to 100, with a score of 75 or higher considered excellent.
Aside from the obvious benefit of clearly separating personal and business expenses, there are other reasons why building business credit is important.Here are three benefits of business credit, as outlined by the Small Business Administration (SBA).
- Businesses have greater credit capacity than personal. As a creditworthy business, you have 10 to 100 times the credit capacity compared to personal credit.
- Business credit protects personal credit. As previously discussed, business credit eliminates the need for additional credit inquiries and obligations that can lower your personal score.
- Business credit increases company value. The creditworthiness and finance ability of a business is a transferable asset that will increase its value to a potential investor or buyer.
In order to start building business credit and protecting your personal credit, your business will need to incorporate and obtain a Federal Tax ID number. Once your business has its own Tax ID number, it is considered a separate entity to the IRS and state agencies; it can file its own taxes and register with a business credit bureau. Before you register, make sure that all of your business licenses are up to date and that you have a business phone number.
It may seem like a lot of work to begin building separate business credit, however the obvious benefits of preserving your personal credit, increasing the credit capacity, and increasing the value of your business make it a smart choice.
If you have questions about the fundability of your business, want information on alternative business financing options, or want to know more about how your personal credit can affect your business credit, contact an expert at the Crestmont Capital for a personal recommendation that will best benefit your specific business funding needs.