While many entrepreneurs start their businesses thinking that their savings and business ideas are sufficient to turn in a handsome profit, they soon find that continued business credit is essential to keep the wheels of commerce turning smoothly. Most banks are wary of lending to fledgling businesses as the risks entailed are greater. The way out of this conundrum is for the entrepreneur to work toward building up a good credit history for their company as early as possible.
One of the essentials for small business credit is a separate business identity for the enterprise. This can be done by registering the company and getting it a separate phone number. Many entrepreneurs initially use their personal credit to obtain funds for their business. This is a big mistake because the company will not be able to establish a credit history. Also, if the business fails, the personal credit rating of the owner also takes a hit. To avoid these disadvantages, it is best to aim for a good credit rating for the business right from the beginning.
Suppliers and Vendors
To build business credit, the business should ask small vendors to make supplies on credit. The next step is to pay these vendors on time and ask them to report this prompt and correct payment to the credit rating agencies. This will soon move the credit rating of the business several notches higher. Many small business owners have used this system to improve their credit rating.
Credit Rating Agencies
Yet another way of improving the credit rating is to obtain a business credit card. Small business owners will find these cards a blessing in many ways. Not only can you charge small purchases such as that of office supplies and gas on this credit card, saving your cash for bigger purchases, you can also build a credit history with these cards. Just make sure that you pay the credit card company in full each month on the due date. Credit card companies automatically report the paying habits to the credit rating agencies, thereby ensuring a positive business credit report your company.
While small businesses typically find it difficult to obtain corporate credit, especially at a low cost, this can be changed if your business is able to offer collateral. If the business owns assets such as land or machinery, offer to pledge them with the bank in return for a low interest loan. A low cost source of funds helps you to repay the loans faster, improving the credit profile of the company.
While it might be tempting to use personal funds and personal credit to fund your business instead of working to build business credit, it is better in the long run to establish a distinct financial profile for your business. This will make future expansions and growth and diversification easier. By making the business a separate entity right from the beginning you will be saving yourself the trouble of separating finances later on. An entrepreneur who plans for the long term will certainly focus on separating their personal finances from the business finances.
Source by Sherry Gabriel W Gain