If you’re a business owner, you’ve probably already been made aware that there are two types of credit- your personal credit score, and your business credit score. If you’re new to the business world or running a business, it might be new to you that there are two types- but don’t worry! In this blog, we’re going to teach you the difference and why establishing business credit is so important. Are you ready?
Person credit. Ahhhh, that lovely credit score that stresses most human beings out. It’s that one number that causes more anxiety than the scale. It’s the one number that can shut every single door to your dream house, dream car, or dream college. Essentially- your personal credit score is a statistical number that tells retailers your “creditworthiness.” I know, it’s such a shame. However, this score IS here to protect lenders, and by doing that- it protects you the borrower. Sometimes we need a harsh does of reality to stop us from doing something inherently stupid, and I’ve found that these credit scores do that better than any “come to Jesus” talk from your Mom ever will.
Writing this reminds me of a story from growing up. My brother, who had recently gotten married, wanted to buy this house that was over 300k. He came to my parents for advice, and they told him, of course, “absolutely not you can’t afford it.” And as is typical with children, he didn’t listen and went ahead and applied for a loan. This was before the housing crash- right before. He was technically approved for the loan- but his home loan officer either had a little compassion for him or was just a stand out person- and he explained to my brother the numbers and where the housing market was headed. He showed my brother his credit score, what would happen if he ended up upside down, and why waiting would be wise. With those number, my brother listened and rented. Then the housing market crashed, and the rest is American history.
But here’s the thing- what if you’re a business owner, land you need some cash or credit to get the business the stuff it needs? Well, this is what business credit is for. Business credit is completely separate from your personal credit (and thank goodness). Instead of running your social security number and checking your personal credit- the business lender will run the businesses tax ID number for a score. The range for business credit is 0-100- obviously the higher, the better. The wonderful about business credit is that it will never affect your personal credit score- the two remain entirely different entities.
So how do you establish businesses credit? By only applying for credit cards or startup loans. Now here’s the thing- it’s hard to get credit when you don’t have credit, so even if you don’t need the money, it’s good practice to get a loan anyways and pay it off early. This will get you the business credit you need so when you’re a pain point in your business, and you require more cash flow for equipment or more staff- you have access to it. And after working for the high-risk business loan industry, I cannot tell you how important it is to establish that business credit and keep it high.
During my time in the firm lending industry, it was hard to see these hard working business owners having to take out loans that started at 5k, but by the time it was paid back they had paid the lender 10k- all because they had small business credit and had to go off personal credit- or because both credit scores were reduced. So- take it from this one- establish your business credit and keep the score high, you won’t be sorry.