Updated: Aug 10, 2019
Building a solid business credit profile is a great way to position your business and avoid some of the financial pitfalls many businesses face early on. Credit cards, loans and lines of credit are some of the most common financing products. Used wisely, your business credit can create opportunities like bank loans or larger credit limits to make investments you need to grow your business.
Business credit cards are similar to personal credit cards in how they function and report to credit bureaus. Most banks and credit card companies have business cards, some even offer secured cards where, you provide collateral (usually a cash deposit) which becomes your available credit amount. Instead of using a business debit card, using a business credit card to pay for office supplies and things you purchase to run your business can establish positive payment history in your business credit profile. Pay down any balance above 9% of your balance. As not-round as that is, I’ll explain:
When you apply for business credit, most times the financing company is pulling your personal credit profile in addition to your business credit. Your payment history on your business card may be reported on your personal credit report depending on the terms of the card. If that’s the case, you want to make sure you keep the account as good as you can. The 9% is all about your credit utilization. This is a measurement of your total credit card balances compared to your total available credit. For example, if you have a $4,500 balance on a credit card with a $10,000 like of credit, your utilization is 45%, 4,500/10,000. The credit scoring agencies say utilization makes up about 35% of your score, that’s almost half. So whatever you can do to get the most credit points for that do it. Experts say a utilization less than 9% is where you see the maximum benefit to your credit score. So if you have a credit card with a $10,000 line of credit, never carry a balance more than $900. As crazy as that sounds, credit is a TOOL, not extra money for you to buy things you probably don’t need. The goal is to get the highest score possible so that when you get to the excellent credit category, now your credit works for you. So with a business credit card you can build your business and personal credit at the same time.
Getting a line of credit is another good way to build good business credit. Think of being able to borrow money, pay it back, then borrow again indefinitely and that’s a line of credit. The interest rates tend to be lower than credit cards which makes this an attractive option.
Building a good credit profile might require you to change the way you think about credit. Some people feel like getting approved for a credit card means it's time to ball out when actually, credit is a tool - leverage you use to acquire the financial resources you need to make things happen.
For more business & tax tips, check out the Tax Deductions episode of The WERKin' Mommas podcast.
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