It’s common practice for rookie entrepreneurs to bankroll their business ventures using a combination of savings and personal credit. What’s surprising—and worrying—is that not all business owners make the transition to business credit once they get the ball rolling. Business credit is hands-down one of the most valuable assets your company can have. As is the case with personal credit, it offers a reflection of (a) your trustworthiness as a potential borrower and (b) your past payment behaviour. For all practical purposes, it makes up the entirety of your company’s financial foundation. The importance of building business credit is the same regardless of the size of your business—even micro-businesses that pull in less than $250,000 a year aren’t exempt.
Below are four reasons why you need to build business credit (starting yesterday).
1. Basic financing
It’s difficult for a company with little to no (traceable) commercial credit history to obtain access to financing. And start-up, day-to-day operations, expansion, you name it—every stage of every business’s life cycle is funded at least partially through credit. So the short answer to why business credit matters is this: you’ll be hard put to survive without it. As of 2012, Dun & Bradstreet has credit information on more than 10 million businesses, not to mention more than 1.05 million unincorporated entities. And that’s just counting Australia. Why do they bother putting together this information? Because lenders need it. If you visit the D&B homepage, this graphic is the first thing you’ll see:
That very fact is the reason why businesses like Dun & Bradstreet, Equifax Commercial, and Experian Business Credit exist. Lenders want to make sure they’ll get their money back (with interest), and one way to guarantee that is to lend only to low-risk entities. And you’ll need a business credit profile to prove that you’re low-risk.
2. Business partnerships
Lenders aren’t the only parties with a vested interest in your credit score. Suppliers, manufacturers, distributors, utility companies, and other vendors are in the same boat. And all of them will pull business credit on you to know whether or not you’re the type to renege on your bills.
3. Risk management
Business credit doesn’t just mitigate risk for lenders and business partners; it also protects the owner. Remember the graphic above? If you financed your business using personal credit, life savings, and/or money borrowed from family and friends, you will be in a difficult position if your venture goes belly-up. Business credit is designed to limit your liability as a business owner, and not just financially. Ensuring that your business is recognized as a separate entity with a separate credit score will give you a measure of protection in the event that your business goes bankrupt or is involved in a business lawsuit.
4. Scalability and transferability
Business credit will come into play if you’re thinking of expanding or selling your business. You’ll need it if you want to finance a delivery vehicle, lease equipment, sell your products via retail chains, or hire a contractor to renovate a new office space. Likewise, your credit portfolio will matter to prospective buyers because it is central to the business’s future outlook. The better your business credit looks, the better your chances are for expansion and/or a profitable sale. Building business credit takes time, but it could make or break your company. Think of it as the difference between a rookie going to a job interview with little more than a cover letter versus another who goes in armed with a full resume, up-to-date references, university transcript, and portfolio. It’s one thing to know that your business has what it takes to succeed; it’s another thing entirely to prove that it does.