Building Business Credit: Why It Matters and 4 Common Mistakes to Avoid

Understanding the importance of building business credit and being aware of the common pitfalls can significantly contribute to the long-term success of your enterprise. In this post, we’ll discuss why building business credit is essential and highlight four common mistakes you should avoid when working on your business credit.

Why is Building Business Credit Important?

Building business credit serves as a foundation for your company’s financial stability. Below are key reasons why developing a robust business credit history is crucial:

1. Opens up Funding Options

High business credit scores indicate to lenders that your business represents a lower risk for late payments or defaults. As a result, a solid business credit history can enhance your qualifications for more loans and business credit cards. Furthermore, higher scores might help you secure better terms and conditions with various credit products. However, remember that your business credit score is just one factor among many that lenders and credit card issuers evaluate to determine your eligibility.

2. Separates Business and Personal Credit

Building business credit often requires a clear separation between business and personal finances. This separation aids in organizing and filing your annual taxes. Using a business bank account and a business credit card makes it easier to monitor your income and expenses distinctly, saving you from the hassle of disentangling mixed finances.

3. Provides a Safety Net

A healthy business credit history acts as a safety net for your business, allowing you to leverage your good credit score to access cash and credit during emergencies. For instance, in a situation where you need to order more inventory than usual, your good business credit could be invaluable.

4. Helps Maintain Cash Liquidity

Liquidity is a measure of how quickly you can convert assets into cash to cover liabilities. With a high business credit score and other qualifying factors, you may gain access to loans and business credit cards, which can lead to increased cash flow. Consequently, you’ll be in a better position to maintain your business’s cash liquidity.

4 Common Mistakes to Avoid When Building Business Credit

While building your business credit, it’s vital to avoid certain pitfalls that could negatively impact your progress. Here are four common mistakes to steer clear of:

1. Missing Payments

Timely payments significantly influence your creditworthiness. A pattern of late payments can deter lenders from working with you and have a detrimental effect on your business credit score. Therefore, always ensure to make all your payments, including loan and credit card payments, on time.

2. Applying for Too Much Credit

Your business credit reports display your history with various lenders, including any credit accounts you’ve applied for or opened. Every time you apply for credit, a hard inquiry is typically made, which can have a small impact on your credit score. However, accumulating many inquiries over a short period can have a larger effect on your credit score and may make lenders wary of approving your applications.

3. Not Monitoring Credit

While it would be ideal if credit reporting and scoring were always accurate, errors do occur. Therefore, it’s crucial to monitor your business credit reports consistently and check for any mistakes that might adversely affect your credit score. If you find unauthorized inquiries or other discrepancies, disputing these errors and having them removed can improve your business credit score.

4. Working with Non-reporting Vendors

Not all vendors report business activities to business credit bureaus. Working with such vendors, despite making timely payments, won’t contribute to your business credit history. Therefore, verify whether a vendor reports credit activity to the major credit bureaus before partnering with them.

In conclusion, building business credit is a cornerstone of your company’s financial health and future growth. Avoiding the common pitfalls and taking the right steps can pave the way for a sturdy business credit profile. Always remember, every step taken towards building business credit is a leap towards long-term business success.