What Every Startup Needs to Know About Lines of Credit – we all love to hate it. It gives us buying power, and then requires that we make good financial choices. Otherwise, we get stuck with big bills and bad scores.
When it comes to credit for your startup, the story is a little different.
Business credit in its many forms—from business-specific credit cards to business lines of credit that allow you to draw on capital— is both a tool to achieve financial health, and a sign of it.
It gives businesses more buying power, it helps businesses to secure business loans, it acts as a protection for small business owners, and more.
Even so, business credit is underutilized by small businesses. As many as 45% of small business owners don’t know that they have a business credit score and as many as 72% aren’t sure where to find information about their business credit score, according to Nav’s Small Business American Dream Gap Report.
Getting business credit and understanding your score is good for you and good for business. Here’s why.
Business credit protects business owners.
According to PaymentsJournal, as many as 36% of small business owners use personal credit cards for business purchases.
And it’s a new trend. The younger the business owner, the more likely he or she is to comingle personal and business funds.
But, this lax attitude is a mistake. Company credit is distinct from an individual, unlike personal credit. This is important especially in the event of a business bankruptcy or lawsuit because it protects a business owner’s personal assets.
While applying for business credit and using it diligently might feel like more work than throwing down your personal card, it can save you enormously in the future.
Business credit multiplies buying power.
While business credit should primarily be used for business expenses and personal credit, for personal expenses, it is possible to blur the lines in a pinch.
The Federal Reserve Bank’s Small Business Credit Survey found that of small-business owners seeking financing, 27% applied for a credit card. Of those small business owners, 63% opened a business card account and 30% opened both business and personal credit cards to use for business needs.
An increase in overall credit capacity can also help your personal financial house. By keeping business expenses strictly on business lines of credit, you can keep your personal credit free for personal needs.
Business credit improves business insurance rates.
Business insurance uses what’s called an “insurance credit score” to help determine rates. Your insurance credit score includes a small list of specific items from your full business credit report.
Why a credit score specific to insurance? Because it has been shown that people with higher credit scores file fewer insurance claims and are more likely to pay their premiums timely.
Items that your business insurance company will consider include the number of credit cards your business holds, the number of outstanding loans and other debts, payment timeliness, and length of credit history.
Business credit helps businesses to thrive and expand.
Because personal credit alone cannot predict the behavior of business, creditors are increasingly moving towards integrating personal and business credit information to assess and predict risk.
This means that small business owners who build a healthy credit history are more prepared to grow. In fact, those who understand their scores are 41% more likely to be approved for a business loan.
And, that buying power translates to confidence. Those that understand their business credit scores are also 31% more likely to consider expanding their business.
When it comes to building business credit, the equation is simple: borrow money and repay it early. (The PAYDEX® score issue by Dun & Bradstreet will only award its highest score to businesses that pay vendors early.)
It might seem like one more thing to do, yes, but it doesn’t have to be difficult. Companies like Nav, a platform for small businesses to compare financing and credit options, can save business owners the time and effort of searching far and wide for the right credit.
Remember that building credit takes time. You need a minimum of two credit accounts with three posted payments for your first score, and much longer to improve a poor score. So, if you haven’t gotten your business credit up and running, now is the time.