There’s no handbook for how to build business credit so it’s no surprise that many business owners make the same mistakes along the way. Some of these errors are small oversights; others will severely limit your ability to secure financing and create years of issues they take to resolve.
The good news? Most business credit mistakes are preventable once you know what to look out for. If you understand where people typically err, you can build better business credit without the trial and error.
Failing to Keep Business and Personal Credit Separate
This is, perhaps, the most common mistake made at both ends of the spectrum. Many small business owners use their personal credit cards for business purchases because it’s more convenient or they don’t yet have business credit cards. Others use business credit cards for personal purchases because the limits are higher.
This creates two issues. Personal credit used for business purchases makes personal credit reports seem as if that individual is carrying high levels of debt; it makes accounting tricky and could even be an issue if audited one day. On the flip side, utilizing business credit cards for personal purchases jeopardizes liability protection and makes it difficult to track legitimate business expenses.
The solution is simple: from day one keep them separate. Use your business credit cards for business expenses and your personal cards for your purchases.
Not Getting Business Credit Soon Enough
Many entrepreneurs wait until they need business credit to establish it; this is backwards. When you’re looking to secure financing for a new piece of equipment or want to expand, it’s too late to look for credit history.
Business credit takes time. Lenders want to see an average borrowing and paying back time of months or years – not weeks. When you start establishing credit early, you have established history to fall back on when opportunities present themselves.
The longer you wait to establish, the less likely you are to secure favorable options like the best business credit cards with ein only – which separate your business finances from your personal credit history.
Even if you have a small business, having one business credit card from the start that you use regularly will create the history and length of time lenders appreciate later on.
Disregarding Business Credit Reports
We hear a lot about personal credit reports – but there are also business credit reports that determine your ability to secure funding for additional supplies down the line or get loans based on your payment history and stability.
The problem is that many people think their credit reports are fine without ever checking them – and therein lie the mistakes. The responsible bureaus for business reporting can make mistakes; they might indicate you’re late on payments when you’re not, or have accounts with other businesses or outdated information that makes your status less stable.
Take time annually to check your small business account. If there are problems – dispute them! It’s just like personal discrepancies but through different agencies.
Utilizing All Credit Limits Constantly
Credit utilization applies to both personal and business credit – if you’re constantly running balances near maximum limits it looks risky to lenders – even if you pay everything off each month.
This isn’t to say that businesses shouldn’t carry balances – in fact, they do all the time in busy seasons or making big purchases. The problem is constantly maxing out utilization percentages – it shows that your business may be financially strapped.
Keeping utilization amounts smaller presents your company as more stable. If you’re constantly at your maximum limit, apply for increased credit lines or an additional small business credit card to lessen the overall percentage.
Missing Payments or Paying Late
Payments can ruin a small business’s future. It only takes one missed payment to drastically lower a small business credit score – and it stays there for years.
This error typically isn’t an intentional move – money might not be flowing at a specific moment causing a hiccup in payment processing or people forget when payments are due.
Setting up automatic payments for minimums ensures that you’re not completely missing payments – at least you’ll be able to manually pay more than the minimum on the due date as opposed to never submitting anything.
For those businesses with variable cash flow, ensuring there’s cash on hand floating around in the business account reserved solely for credit payments is crucial in case something comes up and there’s no money when it’s due.
Neglecting Diversification of Business Credit
Not having various types of small business credit leaves a gaping hole in your ability to provide lenders with well-rounded reports. They expect businesses to handle various types of payments/responsibilities; lenders want to see that small businesses offer a combination – credit cards, vendor lines of credit, equipment financing, or even a small business loan – and if you only have one form you’ve limited yourself.
Many entrepreneurs wait until they get bigger in size or scope before applying but it’s easy to get a vendor account (where the suppliers give small businesses extended payment time) and those are often easier than expected without losing credibility or debt offerings.
Applying For Too Much Credit Simultaneously
Every time you apply for credit it’ll show up on your small business credit report as a hard inquiry. A couple of inquiries are fine; however, applying for five or ten applications in a short period raises red flags; it looks as if you’re desperate for credit – or worse – in dire financial straits.
Shower applying – where you apply at countless lenders in hopes that something sticks – doesn’t work and will harm your small business’ report in the process.
Research what cards or lenders make sense for your small business and apply for those instead of randomly applying just to see what works best down the line.
Building Business Credit Right
Avoiding these mistakes comes down to intentionality from the get-go. Separate small business assets from personal responsibilities, get started establishing credit earlier than needed, check reports once a year, make payments on time, use any provided credit strategically instead of recklessly, and understand what you’re getting into with each offer along the way.
Business credit is something far easier established right than fixed after the fact. Taking time to learn how it works and where people go wrong helps create powerful small-business credits that open doors as opposed to creating hurdles.
